Unrecorded Prepayment Cather Corporation pays the annual premium on its liability insurance policy on April 1 each year and recognizes the full amount as expense. The amount paid last year was $18,000. Due to increased claims against the company, the premium paid in the current year was raised to $31,200. It has been suggested that the company’s accounting treatment of the payments is not in accordance with generally accepted accounting principles.

a. What amount should Cather Corporation report as insurance expense for the current calendar year?

b. What amount would the company report as prepaid insurance at the end of the current year under its existing procedures? What amount should it report?

c. What would be the effect on reported net income for the current year if generally accepted accounting procedures were followed?