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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
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?
thank you for breaking the solution and making it clearer to me
You are welcome.