Multiple Choice
Which of the following is NOT typically classified as a type of receivable on a company's balance sheet?
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7. Receivables and Investments
Types of Receivables
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Which type of receivable is created when a company pays $900 for a $500{,}000 life insurance policy for an employee?
A
Prepaid expense
B
Notes receivable
C
Accounts receivable
D
Other receivable
Verified step by step guidance1
Understand the concept of 'receivables': Receivables are amounts owed to a company by others. They can include accounts receivable, notes receivable, or other receivables. In this case, the company is paying for a life insurance policy, which does not directly relate to accounts or notes receivable.
Analyze the transaction: The company pays $900 for a $500,000 life insurance policy for an employee. This payment is not a loan or a sale, so it does not create accounts receivable or notes receivable.
Identify the nature of the receivable: Since the payment is related to an insurance policy and does not fall under the typical categories of accounts or notes receivable, it is classified as 'Other receivable.' This category includes miscellaneous amounts owed to the company that do not fit into standard receivable categories.
Clarify why it is not a prepaid expense: A prepaid expense occurs when a company pays for goods or services in advance, such as rent or insurance premiums. In this case, the payment is not for the company's own insurance but for an employee's life insurance policy, making it an 'Other receivable' instead.
Conclude the classification: Based on the nature of the transaction and the definitions of receivable types, the correct classification for this payment is 'Other receivable.'
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