Which expression represents the prepaid expense formula?

• A. Commission & brokerage expenses incurred + taxes, licenses & fees incurred + other acquisition field supervision x collection expenses + (1/2) x general expenses incurred
• B. Commission & brokerage expenses incurred + taxes, licenses & fees incurred + other acquisition field supervision + collection expenses + (1/2) x general expenses incurred
• C. Commission & brokerage expenses incurred + taxes, licenses & fees incurred + other acquisition field supervision x collection expenses
• D. Commission & brokerage expenses incurred + taxes, licenses & fees incurred + other acquisition field supervision x collection expenses + general expenses incurred

Answer: (A)

Prepaid expenses reflect costs paid now that will be charged to future policy periods. For insurance accounting, the portion of acquisition-related costs that are expected to support future business—and a share of overhead—are treated as prepaid rather than expensed immediately. Therefore, the formula for prepaid expenses should include all the acquisition-related costs (commissions/brokerages, taxes/licenses/fees, and other acquisition field supervision) plus the costs tied to collecting premiums, and it should allocate only a portion of general expenses to the prepaid amount (typically half).

The expression that combines these components exactly matches this idea: it adds the acquisition-related costs (commissions/brokerages, taxes/licenses/fees, other acquisition field supervision, and collection expenses) and includes half of the general expenses incurred. This aligns with the treatment of acquisition and collection costs as prepaid assets, with general expenses only partly allocated to the prepaid amount. The other options omit or misallocate one or more of these pieces, so they don’t represent the prepaid expense calculation as intended.