Multiple Choice
In the context of investments in securities, what typically happens if the annuitant dies before the annuity start date?
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7. Receivables and Investments
Introduction to Investments in Securities
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Which of the following best describes a prepaid application for individual disability income insurance in the context of accounting for investments in securities?
A
It is classified as an investment in trading securities.
B
It is immediately expensed as an insurance cost upon payment.
C
It is recorded as a liability until the insurance is approved.
D
It is considered a prepaid expense and recorded as an asset until the insurance coverage period begins.
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be received in the future. In accounting, these are recorded as assets because they represent future economic benefits.
Analyze the context of the problem: The prepaid application for individual disability income insurance represents a payment made before the insurance coverage period begins. This aligns with the definition of a prepaid expense.
Determine the correct classification: Since the payment is made in advance and the benefit (insurance coverage) has not yet been received, it should be recorded as an asset under prepaid expenses in the accounting records.
Explain why other options are incorrect: The payment is not classified as an investment in trading securities because it does not involve buying or selling securities. It is not immediately expensed because the benefit has not yet been realized. It is not recorded as a liability because it does not represent an obligation to pay but rather a future benefit.
Conclude the correct treatment: The prepaid application for individual disability income insurance is considered a prepaid expense and recorded as an asset until the insurance coverage period begins, at which point it will be expensed systematically over the coverage period.
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