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Extract Trial Balance on 30 Sep 20×3
Insurance provision $150,000 (CR)Note: on 1 October 20×2 Moby received renewal quote of $400,000 from the company’s property insurer. The director’s were surprised at how much it had 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.
Sir, can you explain, why we credit/subtract $150,000 from administrative expense (Inc.Stmt)? what will be the amount show in Balance sheet? and what are the effect if there is a change in next year figure? (can you just make up a scenario)?
thank you sir for your effort
There should never have been recorded the creation of a provision for an estimated amount that has no reliable basis for estimation!
You are no longer allowed (we used to be until IAS 38!) to make provision for a contingency that is merely possible
So back track on that entry that was recorded:
Dr Provision $400,000
Cr Administrative Expenses $400,000and reverse out too the double entry that paid out $250,000
Dr Cash $250,000
Cr Provision $250,000OK, we’re back to square 1
Now, pay out the $250,000
Dr Administrative Expenses $250,000
Cr Cash $250,000and that gets us to the correct end-point
What has happened to the three accounts?
Cash hasn’t changed
The Provision Account has been reduced to zero
Administrative expenses has been reduced by $150,000
and the Provision Account has been cleared
“what will be the amount show in Balance sheet? and what are the effect if there is a change in next year figure?”
Nothing shown in the statement of financial position – neither an asset nor an obligation
Next year? How much did you pay out next year? $176,000?
OK, Dr Administrative Expenses $176,000
Cr Cash $176,000OK?
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