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Moby Co Adj 3

Forums › ACCA Forums › ACCA FR Financial Reporting Forums › Moby Co Adj 3

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by f6ali.
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    Posts
  • November 17, 2021 at 5:39 pm #640919
    kinza1997
    Participant
    • Topics: 16
    • Replies: 18
    • ☆

    hi..plz help..

    On 1 October 20×2, Moby Co received a renewal quote of $400 000 from the company’s property insurer. The directors were surprised at how much it has 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.

    The solution is to debit administration expense by $ 150 000.

    please let me know about the journal entries for this adjustment

    thank you

    November 18, 2021 at 1:57 pm #640975
    f6ali
    Member
    • Topics: 10
    • Replies: 342
    • ☆☆☆

    Hi.

    From the answer, it is clear that Administrative expenses are ‘credited’ by $150k and not debited (because there is a reduction of $150k).

    Initially, the directors charged $400k to Administrative expenses when estimating insurance provision. It means following entries would have been made:

    Dr Administrative expenses $400k
    Cr Insurance provision $400k

    At the end of the year, it was found that the total amount paid in relation to insurance expenses was only $250k. It shows that the directors overestimated the provision initially, thereby ‘overcharging’ the administrative expenses.

    Therefore the excess amount of $150k ($400k-$250k) should be reversed. The required entry will be:

    Dr Insurance provision $150k
    Cr Administrative expenses $150k

    Are you clear now?

    November 20, 2021 at 7:30 am #641111
    kinza1997
    Participant
    • Topics: 16
    • Replies: 18
    • ☆

    thank you for breaking the solution and making it clearer to me

    November 21, 2021 at 10:04 am #641236
    f6ali
    Member
    • Topics: 10
    • Replies: 342
    • ☆☆☆

    You are welcome.

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