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Hi sir, for December 2013 exam, question on Moby. Regarding transaction (iii) on renewal quote. How do we account for it ?
In the transaction, the double entry of
DR admin expenses $400 000
CR insurance provision $400 000 is correct right ?Then its stated that “During the year, the company incurred $250 000 of expenses relating to previously insured property damage which it has debited to the provision”
Is the debit to the provision a correct entry?
In the statement of profit or loss they minus 150 000 of disallowed provision from the admin expenses. Is this because only 250 000 relates to the current year and the rest do not ?
We’re no longer allowed to provide for a possible expense so the creation of the original provision of $400,000 was incorrect
The $250,000 has been debited to that provision account so now there remains only $150,000 in that account and that needs to be taken back to the statement of profit or loss
The creation of the original provision was:
Dr Profit or loss account Administrative expenses $400,000
Cr Provision account $400,000and the payment of $250,000 has been recorded as:
Dr Provision account $250,000
Cr Cash $250,000That provision creation needs, somehow, to be reversed and we can do that with:
Dr Provision account $400,000
Cr Profit and loss account Administrative expenses $400,000and there is now no longer any provision account against which to debit the $250,000 so let’s reverse that one too:
Dr Cash $250,000
Cr Provision account $250,000Now we have a clean sheet so we can record the payment of the $250,000 correctly:
Dr Repairs and Renewals (?) $250,000
Cr Cash $250,000But we can short-cut all that nonsense simply by getting rid of the remaining figure in the Provision account and crediting profit or loss
Dr Provision account $150,000
Cr Profit or loss Administrative expenses $150,000It doesn’t come out well in writing but if you open the necessary T account and follow through my response, it should work for you
OK?
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