Short and long-term classification of certain assets and liabilities (Part I)
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 |
Prepaid |
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 |
|
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 |
- What are differences between current and non-current assets or liabilities?
- What are contingent liabilities?
- How to prepare balance sheet
- How to account for an increase in the useful life of a fixed asset
- Short and long-term classification of certain assets and liabilities (Part II)
- Can intangible assets be created based on a valuation report?
- Revaluation of fixed assets under US GAAP