## 2. Current and non-current portions of prepaid assets

As was mentioned earlier, the prepaid expenses balance consists of a premium paid in advance for insurance coverage. The following information pertains to the insurance:

 Policy start date 8/1/20X3 Policy end date 7/31/20X6 Coverage period 3 years Premium \$144 Premium payment date 8/1/20X3

The policy covers three (3) years or 36 months. A portion of the prepaid insurance is recognized as insurance expense every month. The monthly expense is \$4 = \$144 ÷ 36 months. As this policy provides coverage over more than a year from the end of the current fiscal year (12/31/20X3), only the portion of prepaid insurance that will be recognized as insurance expense over the next year (12 months) after 12/31/20X3 is considered current. The remainder is a non-current portion and should not be included in current assets on the balance sheet.

The following schedule shows the allocation (expending) of prepaid insurance over the policy coverage period:

 Date Month Insurance Expense Prepaid Insurance Aug 20X3 0 \$0 \$144 Aug 20X3 1 4 140 Sep 20X3 2 4 136 Oct 20X3 3 4 132 Nov 20X3 4 4 128 Dec 20X3 5 4 124 Jan 20X4 6 4 120 Feb 20X4 7 4 116 Mar 20X4 8 4 112 Apr 20X4 9 4 108 May 20X4 10 4 104 Jun 20X4 11 4 100 Jul 20X4 12 4 96 Aug 20X4 13 4 92 Sep 20X4 14 4 88 Oct 20X4 15 4 84 Nov 20X4 16 4 80 Dec 20X4 17 4 76 Jan 20X5 18 4 72 Feb 20X5 19 4 68 Mar 20X5 20 4 64 Apr 20X5 21 4 60 May 20X5 22 4 56 Jun 20X5 23 4 52 Jul 20X5 24 4 48 Aug 20X5 25 4 44 Sep 20X5 26 4 40 Oct 20X5 27 4 36 Nov 20X5 28 4 32 Dec 20X5 29 4 28 Jan 20X6 30 4 24 Feb 20X6 31 4 20 Mar 20X6 32 4 16 Apr 20X6 33 4 12 May 20X6 34 4 8 Jun 20X6 35 4 4 Jul 20X6 36 4 0 Total 144

We can see in the table that the prepaid insurance balance started with \$144 when the premium was paid in August 20X3. By the end of 20X3, \$20 (i.e., \$4 x 5 months) had been recognized as insurance expense leaving a prepaid insurance balance of \$124 (this balance is highlighted in light blue in the table above).

The amount of insurance expense to be recognized over the following 12 months is \$48 (i.e., \$4 x 12 months), and these amounts are highlighted in light orange. The \$48 is the current portion of the prepaid insurance balance because it will be amortized (i.e., “used”) within the next 12 months (i.e., from Jan to Dec 20X4).

The insurance expense to be recognized after that (after Dec 20X4) equals \$76 (i.e., \$4 x 19 months), and these monthly expenses are highlighted in light green in the table. These amounts represent the non-current (long-term) portion of the prepaid insurance balance because they will not be amortized (i.e., “used’) within the 12 months after the end of the current fiscal year. So, the \$76 should be presented as a non-current asset on the balance sheet.

To summarize, based on the discussion above, the 12/31/20X3 prepaid balance of \$124 should be split into the current portion (i.e., \$48) and non-current portion (i.e., \$76) and an adjustment should be made on the balance sheet.

The balance sheet with this adjustment is presented below. Note that a new element is now shown on the balance sheet for the long-term portion of the prepaid insurance balance. This element is presented after the property, plant and equipment line and is titled Other Assets (highlighted in yellow on the balance sheet below):

 Friends Company Consolidated Balance Sheet as of December 31, 20X3 ASSETS Current assets: Cash and cash equivalents \$  3,300 Accounts receivable 2,900 Inventories 2,600 Prepaid expenses 48 Total current assets 8,848 Property, plant and equipment: Buildings 5,000 Machinery, equipment 8,720 Less: Allowance for depreciation (5,500) Property, plant and equipment (net) 8,220 Other assets 76 Total assets 17,144 LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable 1,600 Accrued expenses 1,200 Income taxes payable 900 Deferred rents 153 Total current liabilities 3,853 Long-term note payable 3,953 Stockholder's equity: Common stock 1,000 Paid-in capital 1,850 Retained earnings 6,488 Total stockholder's equity 9,338 Total liabilities and stockholder's equity 17,144
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