- May 3, 2020 at 11:36 pm
The following is an adjustment I find a bit confusing.
“Moby co received a quotation from the property insurer of $400,000, the directors could not believe that it had increased so much and felt that it would be less expensive to ‘self insure’. Accordingly they charged the amount $400,000 to administrative expenses and credited the same to insurance provision. During the year they incurred damage expenses to a previously insured property of $250,000 which the debited to the insurance provision.”
In the solution the amount $150,000 is being deducted from the overall administrative expenses given in the trial balance.
Can anyone tell me what exactly is going on here? I checked with my tutor, they told me that this isn’t a provision but rather an amount set aside to cover for the premium but since the company decided to do away with the insurance policy they deducted the balance 150000 from administrative expenses.
But I feel that the company actually intended to set aside $400,000 as a provision which according to IAS 37 is not permitted since it is not an obligation hence only 150,000 is being deducted from expenses or added back to profit. While the $250,000 has already been written off.
But what i find a bit unusual in the question is the fact that they used the same amount of $400,000 to set aside as an allowance which they felt was expensive.
Would appreciate if anyone could clarify this for me.
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