Because of Recent E

Multiple Choice

Because of recent E. coli outbreaks at nearby farms, the Flora Brothers Farm decided to purchase product liability insurance. Because they expect that the cost of this insurance to rise dramatically if outbreaks continue, they find an insurer willing to enter into a 10-year contract. Assuming that the Flora Brothers paid cash of $120,000 total in exchange for ten years of insurance, how should the Flora Brothers record this contract and cost?

A) Record prepaid insurance of $120,000 (an asset) and then report a $10,000 expense in each year that the contract covers, reducing the prepaid insurance asset by the same amount.
B) Record the entire cost of the contract as a current period expense.
C) Record prepaid insurance of $120,000 (an asset) and then charge $12,000 to each year that the
Contract covers, reducing the prepaid insurance asset by the same amount.
D) Record insurance cost each year of $12,000.