Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Q311, Moby co, Self insurance and charge to cost of goods sold
- This topic has 2 replies, 2 voices, and was last updated 4 years ago by jareerabedin.
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- November 13, 2019 at 3:55 pm #552477
The question:
“On 1 October 2012, Moby received a 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 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.”
In the answer, they subtract 150,000 from administrative expense? how is that possible, because as per the question when they self insured, they debited admin expenses by $400K so admin expense increases by $400k, then they debited provision (credited admin expenses) by $250k. So now, the balance of admin expenses is a positive $150K, so why did they subtract it from the cost of goods sold?
Thank you so very much, itll be extremely helpful if you could help me understand this sir.
November 17, 2019 at 4:52 pm #552927Hi,
A company cannot just self insure itself and create a provision of however much it wishes to incur, so they need to remove the remainder of the provision. As this currently stands at $150,000, then this is the amount that needs to be reversed.
Hope that clears it up for you.
Thanks
November 18, 2019 at 8:03 am #552957Thank you sir !!!
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