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Question

When Castle Corporation pays insurance premiums, the transaction is recorded as a debit to prepaid insurance. Additional information for the year ended December 31 is as follows: Prepaid insurance at January 1$51,500Insurance expense recognized during the year219,250Prepaid insurance at December 3161,450What was the total amount of cash paid by Castle for insurance premiums during the year? Multiple Choice $229,200 $167,750 $209,300 $219,250

Answer

Okay class, let's review the question. Castle Corporation paid for insurance premiums during the year and we want to know the total amount of cash they paid. We can find this information by looking at the change in their pre-paid insurance amount. The correct answer is C, $209,300. The transaction is recorded as a debit to pre-paid insurance, which is an asset account that increases when the business pays for insurance in advance. Each month, as the business uses up the insurance coverage, the balance in the pre-paid insurance account is reduced and the expense is recognized on the income statement. Insurance premiums refer to the cost of a coverage plan for a specific period of time, usually one year, while pre-paid insurance is an account that reflects insurance purchased in advance and that still has value as of a certain date. That's it for today's lesson.