The insurance premium on a commercial property is $9,000. It is due on January 1 and was paid in advance. The sale of the property closed on July 16. Assuming a 360-day year and the buyer paying for the day of closing, what is the buyer's prorated share of the premium at closing?

Rationale

$4,160

To calculate the buyer's prorated share of the insurance premium, we need to determine how many days the buyer is responsible for after the closing date and then apply that to the total premium. The property was insured for a full year, which corresponds to 360 days.

A ($4,126) YOUR ANSWER

This amount does not accurately reflect the prorated share as it underestimates the number of days covered by the premium. The calculation should consider the actual number of days from the closing date to the end of the insurance period.

B ($4,160) CORRECT

This is the correct amount calculated by determining the daily cost of the insurance premium, which is $25 ($9,000 / 360 days). The buyer is responsible for 164 days (from July 16 to December 31), resulting in a total of $4,160 (164 days × $25 per day).

C ($4,860) YOUR ANSWER

This figure is too high as it likely assumes an incorrect number of days or miscalculates the daily premium. The prorated share must be based on the actual period of coverage starting from the date of closing.

D ($4,876) YOUR ANSWER

Similar to option C, this amount overestimates the buyer's share. It appears to miscalculate the daily rate or the total days of responsibility, leading to an inflated prorated figure.

Conclusion

The prorated share of the insurance premium for the buyer is determined by calculating the daily rate and multiplying it by the number of days of coverage after the closing date. In this case, $4,160 is the correct prorated amount for the buyer, reflecting the accurate duration and cost based on the insurance premium and the 360-day year. This calculation is crucial for ensuring both parties understand their financial responsibilities in the sale of the property.

The insurance premium on a commercial property is $9,000. It is due on January 1 and was paid in advance. The sale of the property closed on July 16. Assuming a 360-day year and the buyer paying for the day of closing, what is the buyer's prorated share of the premium at closing?

$4,160

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