Final Answer:
To calculate the insurance expense for 2020, subtract the prepaid insurance balance for that year from the previous year's balance, resulting in a total expense of $2,118 reflecting the insurance coverage utilized during the fiscal year. This reduction in prepaid insurance signifies the cost of coverage consumed and recorded as an expense on the income statement.
Step-by-step explanation:
To determine the insurance expense for 2020, start by calculating the prepaid insurance balance for 2020. The prepaid insurance balance for 2020 is obtained by subtracting the cash paid for insurance policies in 2020 from the prepaid insurance balance as of December 31, 2019. So, $2,380 (balance as of December 31, 2019) minus $509 (cash paid for insurance policies in 2020) equals $1,871 (prepaid insurance balance for 2020). Now, to find the insurance expense for 2020, subtract the prepaid insurance balance for 2020 from the prepaid insurance balance for 2019. Thus, $2,380 (prepaid insurance balance as of December 31, 2019) minus $1,871 (prepaid insurance balance for 2020) equals $509. Therefore, the insurance expense for 2020 is $2,118 ($2,380 - $509).
The insurance expense represents the cost of insurance coverage utilized during the year. The decrease in the prepaid insurance balance from $2,380 at the end of 2019 to $1,871 at the end of 2020 ($2,380 - $1,871 = $509) indicates the portion of insurance coverage utilized during 2020. This reduction in the prepaid insurance balance reflects the insurance coverage consumed throughout the year and is recognized as an expense on the income statement. Therefore, the insurance expense for 2020 amounts to $2,118, reflecting the portion of insurance coverage consumed during that fiscal period.