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 canceled, 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 2015:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2015 | 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, 2015 | 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, 2015 | 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 2016:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2016 | 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, 2016 | 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, 2016 | 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 2017:
Record the cash payment made for premium.
Date | Account Title and Explanation | Debit | Credit |
January 1, 2017 | 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, 2017 | 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, 2017 | 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 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 (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, 2018, 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, 2018.
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, 2018 | 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, 2018 | 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 2018.
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, 2018 | 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.
Want to see more full solutions like this?
Chapter 13 Solutions
Intermediate Accounting: Reporting and Analysis
- Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of 66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.arrow_forwardOn January 1, 2018, King Inc. borrowed $150,000 and signed a 5-year, note payable with a 10% interest rate. Each annual payment is in the amount of $39,569 and payment is due each Dec. 31. What is the journal entry on Jan. 1 to record the cash received and on Dec. 31 to record the annual payment? (You will need to prepare the first row in the amortization table to determine the amounts.)arrow_forwardDiscounting of Notes Payable On October 30, 2019, Sanchez Company acquired a piece of machinery and signed a 12-month note for 24,000. The lace value of the note includes the price of the machinery and interest. The note is to be paid in four 6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%. Required: 1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used. 2. Show how the preceding items would be reported on the December 31, 2019, balance sheet.arrow_forward
- Short-Term Debt Expected to Be Refinanced On December 31, 2019, Excello Electric Company had 1 million of short-term notes payable due February 7, 2020. Excello expected to refinance these notes on a long-term basis. On January 15, 2020, the company issued bonds with a face value of 900,000 for 882,000. On January 22, 2020, the proceeds from the bond issue plus additional cash held by Excello on December 31, 2019, were used to liquidate the 1 million of short-term notes. The December 31, 2019, balance sheet is issued on February 12, 2020. Required: Prepare a partial balance sheet as of December 31, 2019, showing how the 1 million of short-term notes payable should be disclosed. Include an appropriate footnote for proper disclosure.arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Prepare a schedule showing the effect of the notes on net income in each of the 4 years.arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: 1. Prepare a schedule showing annual cash flows fur the two notes in each of the 4 years.arrow_forward
- Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Which figure, net income or net cash flow, does the better job of telling the banks stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.arrow_forwardNaval Inc. issued $200,000 face value bonds at a discount and received $190,000. At the end of 2018, the balance in the Discount on Bonds Payable account is $5,000. This years balance sheet will show a net liability of ________. A. $200,000 B. $180,000 C. $195,000 D. $205,000arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College