Sugar City uses the purchases method to record all prepayments. The city has a 6/30 fiscal year-end. On 12/31/17, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the general fund to be used in general government activities. Cost of the policy was $360,000. After the 6/30/18 closing entries, the appropriate balance sheet accounts and balances in the city's general fund associated with this transaction are
A) Prepaid insurance $300,000; Expenditures $60,000.
B) Prepaid insurance $300,000; Expenditures $360,000
C) Prepaid insurance $0; Expenditures $360,000.
D) Prepaid insurance $0; Expenditures $60,000.

Question

Quizplus · Accepted Answer

Under the purchases method, the entire cost of the insurance policy is recorded as an expenditure when purchased. Therefore, the expenditures account would show $360,000, and there would be no prepaid insurance balance.

Sugar City Uses the Purchases Method to Record All Prepayments