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The question has been taken from Bpp’s mock examination section, page number 187
Hi Tutor, I have another question and I did not understand anything when i checked its answer in Bpp’s answer sheet.
The following trial balance relates to Moby as at 30 September 20X3
$000 $000
Administrative expense 16500
Insurance provision (credit) 150Note.
On 1 october 20X2 Moby received renewal quote of $400,000 from the company’s property insurer. The directors 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 expense 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.in the Answer, It should be solved in the following way
Administrative expense 16500-150(insurance reversal provision=16350Could you explain it why?By the way, explain it by debit and credit because i can get it very well by showing it like that.
thank you in advance and next time i will have question consolidation i will not write PAP instead i will record ”post acquisition period” :):):)It’s not acceptable to make provisions unless the amount involved is reliably measurable and an estimate of $400,000 does not satisfy that requirement.
therefore that charge to the Administrative Expense Account (with the credit going to the provision account) should not have happened
When we paid out $250,000, that should have been:
Dr Administrative expense $250,000
Cr Cash $250,000Instead, what we have done originally was:
Dr Administrative expenses $400,000
Cr Provision $400,000So, to correct, we need to remove that remaining $150,000 from the provision account and take it out of Administrative expenses too
The adjustment is therefore:
Dr Provision $150,000 (and that gets rid of that!)
Cr Administrative expenses $150,000 (and that gets rid of that extra amount that was debited to Administrative expensesBetter?
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