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Daljit received a cheque for $950 from his insurance company in settlement of a claim for repairs to a van. The bookkeeper recorded the cheque correctly in the bank general ledger account, but did not complete the double entry. The total of the trial balance did not agree and a suspense account was opened to record the difference.
What journal entry is required to eliminate the balance on the suspense account?
a.
Debit Suspense $950Credit Insurance $950
Being correction of an error of omission
b.
Debit Insurance $950Credit Suspense $950
Being correction of an error omission
c.
Debit Suspense $950Credit Van repairs $950
Being correction of an error of omission
d.
Debit Van repairs $950Credit Suspense $950
Being correction of an error of omission
what is the answer? the answer is C why not A
The bank record is correct and therefore a suspense account credit was created to deal with the temporary imbalance until error could be found. Finding the error leads to debiting suspense account to close it off and crediting repairs. Insurance is not credited as the payment is related to a specific claim and not some reduction of the insurance expense. Hope this helps.
Another way of looking at it is:
Assume that Daljit had had the van repaired before the insurance claim was settled and before the insurance money money was received. Assume, for simplicity that the repair costs paid by Daljit were $950.
The entry to record that could be:
Dr Repairs $950, Cr Cash 950.
If the insurance company turned down the claim then that would be the end of it: a repair expense of $950.
Now $950 is received from the insurance company and is correctly debited to cash, but no credit entry was made. The TB would show excess Drs of $950, so to make it balance a suspense account of $950 Cr is created. To correct the error the suspense account would be debited $950 and the Repair expense would be credited $950, effectively cancelling the earlier Dr in it. If you receive insurance money in full you haven’t incurred an expense as you have been fully compensated.
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