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Hi,
Can you explain this bit?
On 1 October 2012, Moby received a renewal quote of $400,000 from the company’s property insurer. The directors were surprised at how much it had increased and believed it would be less expensive for the company to ‘self-insure’. Accordingly, they charged $400,000 to administrative expenses and credited the same amount to the insurance provision. During the year, the company incurred $250,000 of expenses relating to previously insured property damage which it has debited to the provision.
Is there any chance of Conceptual framework part coming in section C?
As a separate question?
“Can you explain this bit?”
What needs explaining?
Moby has made a $400,000 provision to fund any payments relating to claims against the company
Dr Administrative Expenses $400,000
Cr Provision $400,000Such a provision doesn’t fit the criteria necessary for a provision to be made so we need to reverse it
Dr Provision $400,000
Cr Administrative Expenses $400,000This reversal brings the Provision account down to $zero and reduces the charge to Administrative Expenses
Now, Moby has paid out $250,000 by way of settling claims against the company
The entry to record this was
Dr Provision $250,000
Cr Cash $250,000but should have been
Dr Administrative Expenses $250,000
Cr Cash $250,000So reverse the first entry
Dr Cash $250,000
Cr Provision $250,000and now put through the correct entry
Dr Administrative Expenses $250,000
Cr Cash $250,000If you were to write down all those journal entries and omit my chat about them, you should finish up with:
Dr Administrative Expenses $250,000
Cr Cash $250,000which is where you wanted to finish up
Now, if you’re feeling up to trying a short-cut, here goes …
Dr Provision $150,000
Cr Administrative Expenses $150,000sorts out the problem with just 2 figures
OK?
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