FA – L1 – Q37 – Accruals and prepayments

Vulcan owns a removal business and runs a small fleet of vans. He prepares his accounts to 31 December each year.
The following transactions occur in relation to insurance for the year 20X9.
1 January: The amount prepaid for insurance was GH¢1,140,000.
1 April: He paid GH¢840,000 insurance for the year ended 31 March 20Y0 on six of the vans.
1 May: He paid GH¢3,540,000 insurance for twenty vans for the year ended 30 April 20Y0.
1 July: He paid GH¢560,000 insurance for the remaining vans for the year ended 30 June 20Y0.

Required:
Write up the insurance account for the year ended 31 December 20X9.

Insurance a/c

Date Details GH¢(000) Date Details GH¢(000)
1 Jan Prepayment b/d 1,140 31 Dec Statement of profit or loss 4,410
1 Apr Bank (6 vans, year to 31 Mar 20Y0) 840 31 Dec Prepayment c/d 2,360
1 May Bank (20 vans, year to 30 Apr 20Y0) 3,540
1 Jul Bank (remaining vans, year to 30 Jun 20Y0) 560
Total 6,770 Total 6,770

Workings
(1) Prepayment at the end of the year

  • Insurance on six vans paid 1 April 20X9: 3/12 × GH¢840,000 = 210
  • Insurance on twenty vans paid 1 May 20X9: 4/12 × GH¢3,540,000 = 1,180
  • Insurance on remaining vans paid 1 July 20X9: 6/12 × GH¢560,000 = 280
    Total Prepayment: 210 + 1,180 + 280 = 2,360

PROOF

  • Charge for the year:
    • Prepayment b/d: 1,140
    • Insurance (9/12 × GH¢840,000) = 630
    • Insurance (8/12 × GH¢3,540,000) = 2,360
    • Insurance (6/12 × GH¢560,000) = 280
      Total Charge: 1,140 + 630 + 2,360 + 280 = 4,410