provision

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) 150

Note.
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=16350

Could 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 $250,000

Instead, what we have done originally was:

Dr Administrative expenses $400,000
Cr Provision $400,000

So, 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 expenses

Better?

the question says to prepare only p/l and statments of changes in equity not financial statement position

if it said to prepare statement of financial position, I would put the rest 250 as provision under non-current liability because you only debited 150 from provision and the rest 250 remained in provision.

debit administrative expense-400
credit provision-400
debit ad expense-250
credit cash-250

debit provision 150
credit ad expense150

but still 250 in provision?