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This is an adjustment from one of the Single Entity question
On 1st October, Moby received a renewal quote of $400,000 from their property insurer. The directors were surprised at how much it had increased and believed it would be less expensive to ‘self insure’. Accordingly, they charged $400,000 to operating expenses and credited the same amount to the insurance provision. During the year expenses of $250,000 were incurred, relating to previously insured property damage which Moby has debited to the provision
Q) Can you explain me what this entire scenario actually means and what is something the company did that they shouldn’t have done and how do they correct it?
Thanks
Hi,
It is tough to understand but the company has created a provision of $400,000 in the accounts based upon the renewal quote from their insurer (1). There is no present obligation as the result of a past event so this should be removed from the accounts.
There has been some expenditure during the year that should have been expensed through profit or loss. They have used the provision (2) when they shouldn’t have.
Have done – DR P/L $400,000 CR Provision $400,00 (1) and DR Provision $250,000 CR Bank $250,000
Should have done – DR P/L $250,000 CR Bank $250,000
I’ll leave it for you to correct………..
Thanks
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