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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Cash Surrender Value of Life Insurance On January 1, 2018, Kehoe Corporation insured the lives of its president, vice president, controller, and treasurer for $100,000 each. The annual premium on each policy is $4,200, payable on January 1 of each year, and the cash surrender values for the policies increase by 4% of the annual premiums paid. Premium payments were made on the scheduled date by Kehoe through 2020, and the following dividends were received at the end of the year on each policy: 2018, $450; 2019, $575; 2020, $550. On February 1, 2021, the treasurer died and Kehoe collected the face value of his policy plus 11 months’ premium.

Required:

Prepare journal entries to record the preceding information for the years 2018 through 2021. Round calculations to the nearest dollar.

To determine

Prepare journal entries to record the transactions of Corporation K related to cash surrender value of life insurance from the year 2018 through 2021.

Explanation

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($4,200×4 officers).

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[($4,200×4%)×4officers].

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 ($16,800$672) as an insurance expense each year.

Prepare journal entries in the books of Corporation K.

For the year 2018:

Record the cash payment made for premium.

DateAccount Title and Explanation Debit Credit 
January 1, 2018Prepaid 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 adjusting entry to increase in the cash surrender value at the end of the year.

DateAccount Title and Explanation Debit Credit 
December 31, 2018Insurance 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.

Cash = Amount of dividend received per year × 4 officers=$450×4=$1,800

Step 2: Record the entry.

DateAccount Title and Explanation Debit Credit 
December 31, 2018Cash$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.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Prepaid 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.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Insurance 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.

Cash = Amount of dividend received per year × 4 officers=$575×4=$2,300

Step 2: Record the entry.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Cash$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.

DateAccount Title and Explanation Debit Credit 
January 1, 2020Prepaid 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.

DateAccount Title and Explanation Debit Credit 
December 31, 2020Insurance 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.

Cash = Amount of dividend received per year × 4 officers=$550×4=$2,200

Step 2: Record the entry.

DateAccount Title and Explanation DebitCredit 
December 31, 2020Cash ($550×4)$2,200 
          Insurance expense $2,200
 (To record the cash received as dividend)  

Table (9)

Description:

Cash is an asset

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