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Difficulty: MediumAdjustments for Accrued and Prepaid Expenses and Incomes

A sole trader extracted a trial balance on 31st December 2025 showing Insurance Expense of N48,000\text{N}48,000. Additional information reveals that this figure includes an annual insurance premium of N24,000\text{N}24,000 paid for the year ending 31st March 2026. What amount should be charged to the Profit and Loss Account for insurance for the year ended 31st December 2025?

  1. ₦42,000Answer
  2. B
    ₦54,000
  3. C
    ₦48,000
  4. D
    ₦24,000

Answer

The amount to be charged to the Profit and Loss Account for insurance for the year ended 31st December 2025 is ₦42,000.
The correct option is ₦42,000 because 3 months of the annual policy (January to March 2026) fall into the next financial year. Calculating 312×N24,000\frac{3}{12} \times \text{N}24,000 gives a prepayment of ₦6,000. Subtracting ₦6,000 from the total trial balance amount of ₦48,000 gives the net expense of ₦42,000 for the year ended 31st December 2025.

Step-by-Step Solution

1
Determine the unexpired prepaid period relating to the next accounting period.
The annual policy extends from 1st April 2025 to 31st March 2026. The period from 1st January 2026 to 31st March 2026 equals 3 months prepaid.
Accrual concept requires matching expenses to the period in which they are incurred.
2
Calculate the prepaid portion of the insurance premium.
Prepaid Insurance=312×N24,000=N6,000\text{Prepaid Insurance} = \frac{3}{12} \times \text{N}24,000 = \text{N}6,000.
Only 9 months of the annual premium relate to the current financial year.
3
Deduct the prepaid insurance from the total cash paid as shown in the trial balance.
Insurance Charge=N48,000−N6,000=N42,000\text{Insurance Charge} = \text{N}48,000 - \text{N}6,000 = \text{N}42,000.
Prepaid expenses must be subtracted from total trial balance expense to determine the net profit and loss expense.

Key Concept

Matching concept and expense prepayment adjustment
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Topics

Adjustments for Accrued and Prepaid Expenses and Incomes

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