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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Cash Surrender Value of Life Insurance Westford Corporation purchases life insurance policies on its officers, and these policies all carry a cash surrender value clause. At the beginning of 2019, Westford paid $13,300 in life insurance premiums for one year. During 2019, the cash surrender value of the policies increased from $98,450 to $103,900. At the beginning of 2020, Westford’s vice president died in an automobile accident. The policy carried on this officer paid $50,000, and the cash surrender value of the policy was $6,480.

Required:

Prepare journal entries to record the preceding information on Westford’s books.

To determine

Record the journal entries in the books of Corporation W.

Explanation

Cash surrender value of life insurance:

A company might purchase a life insurance policy for its officers, these policies are generally taken to compensate the loss of executive skill at the time of sudden demise of the officer.

The accumulated premiums are considered as a savings plan. When the policy is canceled, then the company is entitled to receive the cash surrender value of the policy.

Record the cash payment made for premium.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Prepaid insurance$13,300 
 Cash $13,300
 (To record the payment of premium for its officers)  

Table (1)

Corporation W has paid life insurance premium for one year for 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.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Insurance expense$7,850 
 Cash surrender value of life insurance ($103,900$98,450)$5,450 
 Prepaid insurance $13,300
 (To adjust the increase in cash surrender value and recognize the expense)  

Table (2)

Cash surrender value of life insurance is increased by $5,450($103,900$98,450)

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