Can anyone tell me if this is correct and if not what I did wrong. Thank you
Exercise 3-7
On March 1, 2003, a company paid a $16,200 premium on a 36-month insurance policy for coverage
beginning on that date. Refer to that policy and fill in the blanks in the following table:
Check 2005 insurance expense:
Accrual, $5,400; Cash, $0. Dec. 31, 2005,
asset: Accrual, $900; Cash, $0
Balance Sheet Insurance Asset Using
Accrual Basis Cash Basis
Dec. 31, 2003 $_450.00____ $___0__
Dec. 31, 2004 _6,300.00 ___ ___0__
Dec. 31, 2005 _900.00_____ ___0___
Dec. 31, 2006 _____0__ ____0___
Insurance Expense Using
Accrual Basis Cash Basis
Dec. 31, 2003 $4,500.00__$_16,000______
Dec. 31, 2004 __5,400.00______ _______
Dec. 31, 2005 __5,400.00 ____ ___0____
Dec. 31, 2006 __900.00______ ___0____
Total $_16,200.00______ $_16,000__
To determine if the information provided is correct, we need to calculate the insurance expenses and balance sheet values based on the given information.
First, let's break down the information provided in the table:
- March 1, 2003: The company paid a $16,200 premium on a 36-month insurance policy, starting from this date.
- Dec. 31, 2005: The insurance expense accrued is $5,400, and there is no cash payment. The insurance asset on this date is $900, and there is no cash payment.
Based on this information, we need to calculate the values for each date in the table.
For the Balance Sheet, using the accrual basis:
- Dec. 31, 2003: The insurance asset should be $450. This is calculated by dividing the premium by the number of months covered in the policy (36) and multiplying it by the remaining coverage period (12 months).
- Dec. 31, 2004: The insurance asset should be $6,300. This is calculated by subtracting the insurance expense of $4,500 (accrued basis) from the previous year's balance sheet value of $450 and then adding the premium amount paid.
- Dec. 31, 2005: The insurance asset should be $900. This is calculated by subtracting the insurance expense of $5,400 (accrued basis) from the previous year's balance sheet value of $6,300.
- Dec. 31, 2006: The insurance asset should be $0. As there is no additional premium payment or expense, the value remains the same as the previous year.
For the Balance Sheet, using the cash basis:
- All values should be $0 as there is no cash payment for insurance.
For the Insurance Expense, using the accrual basis:
- Dec. 31, 2003: The insurance expense should be $4,500, which is the same as the accrued expense for that year.
- Dec. 31, 2004: The insurance expense should be $5,400. This is the same as the accrued expense in that year.
- Dec. 31, 2005: The insurance expense should be $5,400. This is the same as the accrued expense in that year.
- Dec. 31, 2006: The insurance expense should be $900. This is the same as the accrued expense in that year.
For the Insurance Expense, using the cash basis:
- Dec. 31, 2003: The cash payment for insurance should be $16,000, which is the same as the total premium paid.
- Dec. 31, 2004: The cash payment for insurance should be $0, as there is no additional premium payment.
- Dec. 31, 2005: The cash payment for insurance should be $0, as there is no additional premium payment.
- Dec. 31, 2006: The cash payment for insurance should be $0, as there is no additional premium payment.
By comparing the calculated values with the provided table, we can determine if the information is correct.