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?单项选择题
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?单项选择题

A

$15,570

B

$43,740

C

$18,720

D

$49,860

BlackTom AI · Accepted Answer

We start by identifying the two insurance policies and their terms, since prepaid insurance is amortized over time as the benefits are received.
Policy 1 (equipment damage): cost = 37,260 for 18 months starting Jan 1, 2027.
- Monthly amortization = 37,260 ÷ 18 = 2,070 per month.
- From Jan 1, 2027 through Dec 31, 2027 is 12 months of usage.
- Insurance expense for 2027 = 2,070 × 12 = 24,840.
- Remaining prepaid at Dec 31, 2027 for this policy = 37,260 − 24,840 = 12,420.
Policy 2 (crop damage): cost = 12,600 for 24 months (two-year term).
- Monthly amortization = 12,600 ÷ 24 = 525 per month.
- For 2027 (12 months), expense = 525 × 12 = 6,300.
- Remaining prepaid at Dec 31, 2027 for this policy = 12,600 − 6,300 = 6,300.
Now combine the remaining prepaid balances from both policies:
- 12,420 (equipment policy) + 6,300 (crop policy) = 18,720.
Thus, the balance in Eve’s prepaid insurance as of December 31, 2027 is 18,720.

Evaluating the provided options:
- Option $15,570: This would imply less prepaid remaining than calculated, perhaps by misallocating months or miscalculating monthly amortization; however, the correct monthly amortizations are 2,070 for 18 months and 525 for 24 months, leading to the 18,720 total.
- Option $43,740: This would reflect summing the full policy costs (or overestimating the prepaid) without considering amortization over time.
- Option $18,720: This matches the detailed month-by-month amortization for both policies and their remaining balances.
- Option $49,860: This greatly overstates prepaid by treating the entire costs as remaining prepaid without recognizing that portions have been expensed in 2027.

In summary, applying the proper straight-line amortization to each policy over its term yields a total prepaid balance of 18,720 on December 31, 2027. The other amounts arise from incorrect allocation of months or misunderstanding of expensing vs. prepaying.

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