How to report prepaid insurance of an unpaid portion of insurance premium?

Question

We have an Insurance policy for a project for four years with a total premium amount of US $ 48,000/-, due to the long relationship with insurance company, they agreed to pay insurance by 24 months instead of the usual practice of payment on policy issue date. As on 31st December 2016 US$ 8000/- was pending and settled the full amount April 2017.
 
Project Period : 1 Sept 2015 to 31 Aug 2019
Policy period : 1 May 2015 to 31 Aug 2019 (Policy issued 5 months prior to start project for signing the contract agreement)
Premium payment period:  May 2015 to April 2017. (Even though the premium payment is in installment, we are liable to pay $ 48000 on the first day of issuance of policy i.e 1 May 2015)

Kindly advice me, how to treat prepayments and sundry creditors in ledger and financial report as at 31st December 2016?

Looking for expert advice with apt justifications.

Answer 1

at time of payment of premium. following entry would be passed as you are required to pay full amount of premium on first day of contract

prepaid insurance Dr 48,000
Bank Cr 48,000

at end of every month you are required to pass following entry in order to record expense of that month

insurance expense Dr 2,000
prepaid insurance Cr 2,000

Answer 2

Total premium needs to be spread over the policy period  i.e. 1 May 2015 to 31 Aug 2019. Any earlier payment or prior payments need to be shown as prepayments or payable.

Assuming your financial year ends in December:

When you get the policy:

Insurance Exp DR 8000
Insurance payable CR 48000
Insurance policy DR 40000


In 2016 you charge from
Insurance Exp DR 12000
Insurance Policy CR 12000

Assuming you paid 40000 in Dec 2016

Insurance payable DR 40000
Bank CR 40000