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Hello Mike
I have a doubt regarding the insurance provision .The question goes like this
On 1st October moby received renewal quote of $400000 from the company’s property insurer .the directors were surprised at how much it had increased and believed that it is less expensive for the company to self insure .accordingly they charged $400000 to administrative expense and credited the same amount to the insurance provision .during the year the company incurred $250000 of expenses relating to previously insured property damage which it has debited to the provision kindly help me out dealing with it in the statement of profit and loss
.the way they treated this adjustment is that $150000 has been deducted from the administrative expense…..help me with the logic behind this
Thank youThe creation of the $400,000 is not allowed so we need to reverse that entry (you can’t provide for a possibility)
Dr Provision $400,000
Cr Administrative expenses $400,000Then, when they incur $250,000 costs during the year, that should have been expensed
Dr Administrative expenses $250,000
Cr Cash $250,000The net effect is to:
Dr Provision $400,000
Cr Cash $250,000
Cr Administrative expenses $150,000The whole issue revolves around Moby incorrectly creating a provision for a liability that was neither measurable reliably nor had it arisen from some past event
Better?
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