Eve's Apples opened its business on January 1, 2027, and paid for two insurance policies effective that date. The policy for equipment damage was $37,260 for 18 months, and the crop damage policy was $12,600 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2027?Single choice
A
$15,570
B
$43,740
C
$18,720
D
$49,860

Question

Eve's Apples opened its business on January 1, 2027, and paid for two insurance policies effective that date. The policy for equipment damage was $37,260 for 18 months, and the crop damage policy was $12,600 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2027?Single choice

A

$15,570

B

$43,740

C

$18,720

D

$49,860

BlackTom AI · Accepted Answer

We start by identifying the two insurance policies Eve's Apples purchased on January 1, 2027, and determine how much of each policy remains unexpired as of December 31, 2027.

Option analysis:
- Policy A (equipment damage): $37,260 for 18 months. Monthly cost = 37,260 ÷ 18 = 2,070 per month. From Jan 1, 2027 through Dec 31, 2027 is 12 months of use. Amount expensed to date = 12 × 2,070 = 24,840. Remaining prepaid balance for this policy = 37,260 − 24,840 = 12,420.
- Policy B (crop damage): $12,600 for 24 months. Monthly cost = 12,600 ÷ 24 = 525 per month. From Jan 1, 2027 through Dec 31, 2027 is 12 months of use. Amount expensed to date = 12 × 525 = 6,300. Remaining prepaid balance for this policy = 12,600 − 6,300 = 6,300.

Aggregate prepaid balance as of December 31, 2027 = 12,420 (policy A) + 6,300 (policy B) = 18,720.

Now evaluate the answer choices:
- $15,570: This would require a different allocation or different month counts; with the standard straight-line monthly amortization from Jan 1, 2027 to Dec 31, 2027 under the given terms, this amount does not match the calculated remaining prepaid balance.
- $43,740: This is far larger than the total unexpired balances from both policies and would imply either double-counting or not amortizing at all, which is inconsistent with prepaid insurance accounting.
- $18,720: This exactly matches the sum of remaining balances calculated for both policies using straight-line monthly amortization over the 12 months in 2027.
- $49,860: This exceeds the initial total of both policies and would imply more than the full value of the policies remains prepaid, which cannot be the case after expensing 12 months of coverage.

In summary, the reasoning above shows that the correct unexpired prepaid insurance balance at year-end, using standard amortization, is 12,420 for the equipment policy plus 6,300 for the crop policy, totaling 18,720. The option that reflects this total is the third option listed.

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Eve's Apples opened its business on January 1, 2027, and paid for two insurance policies effective that date. The policy for equipment damage was $37,260 for 18 months, and the crop damage policy was $12,600 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2027?

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