USA Unpaid prepaid


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Hello,

My company maintains an insurance policy for with (using round numbers) a down payment of $450K, followed by 8 additional monthly installments of $50K.

This policy runs from October 1st, 2014 through July 2015. My boss is stating that we should record this as an accrual with an offsetting prepaid expense and amortize the prepaid down as we make payments. However, then at year-end, we will have $350K of a prepaid expense for which we have not yet paid. Of course, the accrual will be offsetting, however there is still no asset as far as I can tell.

Should I plan to record this as a prepaid, or should I suggest that we only record the expense as the installments are paid?

Thanks in advance, and happy closing to all.
 
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bklynboy

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Record as installments are due. There is no liability until payment is required. And Yes, you cannot set up a prepaid asset for something you have not paid.
 
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thanks

This was my thought as well.

Always interested in more thoughts if people have them!
 

kirby

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Timeout Aaroncraft.
If you go the way you describe then for 3 months in 2014 your insurance expense is $500K and for 7 months in 2015 it is $350K. No way.
So first get the sum of the payments which is $850K and take that over the 10 month term to get expense of $85K a month.
Now if you did post 500K insurance exp in 2014 you need to post this entry
dr Prepaid exp 245K
cr Insurance exp 245K
to get to a 2014 exp of $255K (85 times 3) and you will soon see why boss wants to do it his/her way. Not saying boss is right just it's easier to follow.
 
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bklynboy

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Good catch Kirby. Though I think its a 9 month policy since he pays 9 installments and implies it ends July 1.

After re reading, the monthly expense is $94.44K ($850K total premium over 9 months). Day 1 they prepaid $355.56 ($450K - $94.44K). So If we prepare a schedule here is how I see the impacts:

Expense Cash Paid Prepaid Asset
Oct-14 94.44 450.00 355.56
Nov-14 94.44 50.00 311.12
Dec-14 94.44 50.00 266.67
Jan-15 94.44 50.00 222.23
Feb-15 94.44 50.00 177.78
Mar-15 94.44 50.00 133.34
Apr-15 94.44 50.00 88.89
May-15 94.44 50.00 44.45
Jun-15 94.44 50.00 0.00

Total 850.00 850.00
 

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