Prepare
Explanation of Solution
Cash surrender value of life insurance
A company which buy a life insurance policy for its officers, this policy usually taken to compensate the loss of executive skill at the time of sudden death of the officer. Many a time accumulated premium are considered as a savings plan. When the policy is cancelled, then the company will receive the cash surrender value of the policy.
Corporation K paid life insurance for the life of its president, vice president, controller, and treasurer. Life insurance covers $100,000 for each officer. Corporation K paid annual premium of $16,800
There is an increase of 4% in the cash surrender value of life insurance each year. Therefore, every year the cash surrender value of life insurance would be increased by $672
An amount of difference between the prepaid insurance paid each year and increased cash surrender value of life insurance would be recognized as insurance expense of each year. Corporation K recognizes $16,128
Prepare journal entries in the books of Corporation K.
For the year 2018:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2018 | Prepaid insurance | $16,800 | |
Cash | $16,800 | ||
(To record the payment of premium for 4 officers) |
Table (1)
Description:
Corporation K paid life insurance premium for one year for 4 of its officers. Prepaid insurance is increased therefore, it is debited. Cash is decreased, therefore, it is credited.
Record the
Date | Account Title and Explanation | Debit | Credit |
December 31, 2018 | Insurance expense | $16,128 | |
Cash surrender value of life insurance | $672 | ||
Prepaid insurance | $16,800 | ||
(To adjust the increase in cash surrender value and recognize the expense) |
Table (2)
Description:
Cash surrender value of life insurance is increased. Therefore, it is debited. Usually, company records the part of the yearly premium that does not increase the Cash surrender value of the policy as insurance expense. Therefore, insurance expense is debited. Prepaid insurance is decreased; therefore, it is credited.
Record the amount of dividend received.
Step 1: Determine the amount of cash received as dividend.
Step 2: Record the entry.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2018 | Cash | $1,800 | |
Insurance expense | $1,800 | ||
(To record the cash received as dividend) |
Table (3)
Description:
Cash is an asset. There is an increase in asset. Therefore, it is debited. Whenever, there is a dividend income from an insurance policy, it should be recorded as decrease in insurance expense. Therefore, insurance expense account is credited here.
For the year 2019:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2019 | Prepaid insurance | $16,800 | |
Cash | $16,800 | ||
(To record the payment of premium for 4 officers) |
Table (4)
Description:
Corporation K paid life insurance premium for one year for 4 of its officers. Prepaid insurance is increased therefore, it is debited. Cash is decreased, therefore, it is credited.
Record the adjusting entry to increase in the cash surrender value at the end of the year.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2019 | Insurance expense | $16,128 | |
Cash surrender value of life insurance | $672 | ||
Prepaid insurance | $16,800 | ||
(To adjust the increase in cash surrender value and recognize the expense) |
Table (5)
Description:
Cash surrender value of life insurance is increased. Therefore, it is debited. Usually, company records the part of the yearly premium that does not increase the Cash surrender value of the policy as insurance expense. Therefore, insurance expense is debited. Prepaid insurance is decreased; therefore, it is credited.
Record the amount of dividend received.
Step 1: Determine the amount of cash received as dividend.
Step 2: Record the entry.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2019 | Cash | $2,300 | |
Insurance expense | $2,300 | ||
(To record the cash received as dividend) |
Table (6)
Description:
Cash is an asset. There is an increase in asset. Therefore, it is debited. Whenever, there is a dividend income from an insurance policy, it should be recorded as decrease in insurance expense. Therefore, insurance expense account is credited here.
For the year 2020:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2020 | Prepaid insurance | $16,800 | |
Cash | $16,800 | ||
(To record the payment of premium for 4 officers) |
Table (7)
Description:
Corporation K paid life insurance premium for one year for 4 of its officers. Prepaid insurance is increased therefore, it is debited. Cash is decreased, therefore, it is credited.
Record the adjusting entry to increase in the cash surrender value at the end of the year.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2020 | Insurance expense | $16,128 | |
Cash surrender value of life insurance | $672 | ||
Prepaid insurance | $16,800 | ||
(To adjust the increase in cash surrender value and recognize the expense) |
Table (8)
Description:
Cash surrender value of life insurance is increased. Therefore, it is debited. Usually, company records the part of the yearly premium that does not increase the Cash surrender value of the policy as insurance expense. Therefore, insurance expense is debited. Prepaid insurance is decreased; therefore, it is credited.
Record the amount of dividend received.
Step 1: Determine the amount of cash received as dividend.
Step 2: Record the entry.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2020 | Cash | $2,200 | |
Insurance expense | $2,200 | ||
(To record the cash received as dividend) |
Table (9)
Description:
Cash is an asset. There is an increase in asset. Therefore, it is debited. Whenever, there is a dividend income from an insurance policy, it should be recorded as decrease in insurance expense. Therefore, insurance expense account is credited here.
For the year 2021:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2021 | Prepaid insurance | $16,800 | |
Cash | $16,800 | ||
(To record the payment of premium for 4 officers) |
Table (10)
Description:
Corporation K paid life insurance premium for one year for 4 of its officers. Prepaid insurance is increased therefore, it is debited. Cash is decreased, therefore, it is credited.
On February 1, 2021, Corporation K’s treasurer died. Hence, Corporation K collected the face value of treasurer policy along with 11 months’ premium.
Record the adjusting entry to increase in the cash surrender value at February 1, 2021.
Step 1: Determine the increase in cash surrender value of life insurance for 1 month for treasurer.
Step 2: Determine the amount of decrease in the prepaid insurance for 1 month for treasurer.
Step 3: Determine the amount of insurance expense incurred for 1 month for treasurer.
Step 4: Record the adjusting entry.
Date | Account Title and Explanation | Debit | Credit |
February 1, 2021 | Insurance expense | $336 | |
Cash surrender value of life insurance | $14 | ||
Prepaid insurance | $350 | ||
(To adjust the increase in cash surrender value and recognize the expense for 1 month on treasurer's policy) |
Table (11)
Description:
Cash surrender value of life insurance is increased. Therefore, it is debited. Usually, company records the part of the yearly premium that does not increase the Cash surrender value of the policy as insurance expense. Therefore, insurance expense is debited. Prepaid insurance is decreased; therefore, it is credited.
Record the gain on insurance policy due to the death of the treasurer.
Date | Account Title and Explanation | Debit | Credit |
February 1, 2021 | Cash | $103,850 | |
Cash surrender value of life insurance | $518 | ||
Prepaid insurance | $3,850 | ||
Gain on death of treasurer | $99,482 | ||
(To record the gain on death of treasurer) |
Table (12)
Description:
Collection of prepaid insurance premium for 11 months on treasurer’s policy is $3,850
Record the adjusting entry to increase in the cash surrender value for remaining 3 officers’ policy at the end of the year 2021.
Step 1: Determine the amount of increase in the cash surrender value of life insurance.
Step 2: Determine the amount of decrease in the prepaid insurance for 3 officers.
Step 2: Determine the amount of insurance expense.
Step 4: Record the entry.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2021 | Insurance expense | $12,096 | |
Cash surrender value of life insurance | $504 | ||
Prepaid insurance | $12,600 | ||
(To adjust the increase in cash surrender value and recognize the expense) |
Table (13)
Description:
Cash surrender value of life insurance is increased. Therefore, it is debited. Usually, company records the part of the yearly premium that does not increase the Cash surrender value of the policy as insurance expense. Therefore, it is debited. Prepaid insurance is decreased; therefore, it is credited.
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