Exercise 3-7

Determining assets and expenses
for accrual and cash accounting
C2
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 Insurance Expense Using
Accrual Cash Accrual Cash
Basis Basis Basis Basis
Dec. 31, 2003 $_______ $_______ 2003 $_______ $_______
Dec. 31, 2004 _______ _______ 2004 _______ _______
Dec. 31, 2005 _______ _______ 2005 _______ _______
Dec. 31, 2006 _______ _______ 2006 _______ _______
Total $_______ $_______

To fill in the blanks in the table, we need to understand the difference between accrual and cash accounting and how it affects the recognition of assets and expenses.

Accrual accounting recognizes revenue and expenses when they are incurred, regardless of when cash is exchanged. This means that even if cash hasn't been paid or received, expenses and assets can still be recorded. On the other hand, cash accounting records revenue and expenses only when cash is actually paid or received.

In this case, on March 1, 2003, the company paid a $16,200 premium for a 36-month insurance policy. Let's use this information to fill in the table:

Dec. 31, 2003:
For accrual basis, since one year has passed since the policy was purchased, we can recognize 1/36th of the premium expense as insurance expense. Therefore, the insurance expense using accrual basis for 2003 would be $16,200 / 36 = $450.
For cash basis, no cash payment has been made in 2003, so the insurance expense using cash basis would be $0.
Regarding the insurance asset, since the policy has a duration of 36 months and only one year has passed, 1/36th of the premium is still an asset. Therefore, the insurance asset using accrual basis for 2003 would be $16,200 / 36 = $450. For cash basis, no cash payment has been made, so the insurance asset would also be $0.

Dec. 31, 2004:
For both accrual and cash basis, another year has passed since the policy was purchased. Therefore, the insurance expense for 2004 using both accrual and cash basis would be $16,200 / 36 = $450.
Since no cash payment has been made, both the insurance asset using accrual and cash basis would be $0.

Dec. 31, 2005:
The table states that the insurance expense using accrual basis is $5,400 and the insurance expense using cash basis is $0. So we can fill in these values directly.
Similarly, the insurance asset using accrual basis is $900 and the insurance asset using cash basis is $0, as per the table.

Dec. 31, 2006:
Since the policy was for 36 months, it will expire at this point. Therefore, both the insurance expense and asset would be $0 for both accrual and cash basis.

Total:
To calculate the total expense and asset, we can add up the values for each category.
For the insurance expense and asset using accrual basis, we add up the values calculated for each year.
For the insurance expense and asset using cash basis, we add up the respective values from the table.

Using this approach, you can now fill in the blanks in the table based on the explanations provided above.