Question

GBE Company paid $12,000 cash for insurance in March that provides coverage for six months, from July through December. How much expense should be recognized in March to be in accordance with generally accepted accounting principles?

a. $2,000
b. $12,000
c. No expense should be recognized in March.
d. $6,000

Answer 1

No expense should be recognized in March for GBE Company's insurance payment, as it is considered a prepaid expense and the coverage period starts in July, not in March.

Step-by-step explanation:

The question is related to the accounting concept of prepayments and expense recognition under generally accepted accounting principles (GAAP).

When GBE Company pays $12,000 cash for insurance that provides coverage for future months (July through December), the payment is considered a prepaid expense, which is an asset, not an expense, in the month of March. According to GAAP, expenses should be recognized in the period in which they are incurred.

In this case, the insurance expense will be recognized when the coverage period starts in July. Therefore, in March, no insurance expense should be recognized.