Sugar City Uses the Purchases Method to Record All Prepayments

question 55

Multiple Choice

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.

---

Definitions:

Land Account

A type of asset account on the balance sheet representing the cost of land owned by a company.

Accounts Payable

Liabilities of a business that are due to be paid to creditors within a short period of time, typically one year.

Supplies Expense

This refers to the cost recorded for supplies used during an accounting period, not necessarily when they were purchased.

Operating Income

Income generated from normal business operations, calculated by subtracting operating expenses from the gross profit.