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On March 1, 2003, a company paid a $16,200 premium on a 36- month insurance policy for a coverage beginning on that date. Refer to that policy and fill in the blanks in the following table:
Balance Sheet Insurance Asset Using
Accrual Cash
Basis Basis
Dec, 31, 2003 $_16,200 $_0__
Dec. 31, 2004 $__________ $_______________
Dec. 31, 2005 $__________ $_______________
Dec 31, 2006 $__________ $_______________
Insurance Expense Using
Accrual Cash
Basis Basis
Dec, 31, 2003 $_4500_ $__0____
Dec. 31, 2004 $ _5400____ $___0____
Dec. 31, 2005 $_5400 $___0___
Dec 31, 2006 $__________ $________
to a month a mount covered is 16200:36=450 dollars
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 $11,700 $0
Dec. 31, 2004 $ 6,300 0
Dec. 31, 2005 $ 900 0
Dec. 31, 2006 $ 0
Accrual Basis Cash Basis
2003 $4,500 $16,200
2004 5,400 0
2005 5,400 0
2006 900 0
Total $ 16,200
========
Explanation
Monthly premium per month $450
$16,200 / 36 = $450
Remaining
2003 26 months $11,700
2004 14 6,300
2005 12 4,500
2006 12 4.500
To fill in the blanks in the table, we need to understand how insurance premiums and expenses are recorded on the balance sheet and income statement. Here's how you can calculate the amounts:
1. Balance Sheet - Insurance Asset:
March 1, 2003: The company paid a $16,200 premium for a 36-month insurance policy. Since the coverage began on that date, we classify the $16,200 as an insurance asset in the balance sheet.
Dec. 31, 2003: Since only a portion of the policy term has passed, we need to calculate the remaining insurance asset. Subtract the insurance expense for the year from the initial premium: $16,200 - $4,500 = $11,700. This amount represents the remaining insurance asset at the end of 2003.
Dec. 31, 2004: To calculate the remaining insurance asset for the next year, subtract the insurance expense for 2004 from the previous year's remaining insurance asset: $11,700 - $5,400 = $6,300.
Dec. 31, 2005: Repeat the same calculation for 2005. $6,300 - $5,400 = $900.
Dec. 31, 2006: As three years have passed since the coverage began, the remaining insurance asset at the end of 2006 will be $0.
2. Balance Sheet - Cash Basis:
Since we are using the accrual basis for calculating the insurance asset, the cash basis for insurance in the balance sheet will always be $0. This is because the company paid the premium in cash initially, and it does not change based on the remaining insurance asset.
3. Insurance Expense - Accrual Basis:
To calculate the insurance expense, we need to determine the amount for each year. The premium is spread evenly over the 36-month policy period.
Dec. 31, 2003: The first year's insurance expense is $16,200 / 36 = $4,500.
Dec. 31, 2004: The second year's insurance expense is also $4,500 as it remains constant throughout the policy term.
Dec. 31, 2005: The third year's insurance expense is again $4,500.
Dec. 31, 2006: Since it is the end of the policy term, the insurance expense for 2006 is $0.
4. Insurance Expense - Cash Basis:
Similar to the cash basis on the balance sheet, the insurance expense using the cash basis will also be $0 each year. This is because the expense is recorded on an accrual basis, not when cash is paid.
Now, you can fill in the table with the calculated amounts:
Balance Sheet - Insurance Asset Using Accrual Basis:
Dec. 31, 2003: $11,700
Dec. 31, 2004: $6,300
Dec. 31, 2005: $900
Dec. 31, 2006: $0
Balance Sheet - Insurance Asset Using Cash Basis: Always $0
Insurance Expense Using Accrual Basis:
Dec. 31, 2003: $4,500
Dec. 31, 2004: $4,500
Dec. 31, 2005: $4,500
Dec. 31, 2006: $0
Insurance Expense Using Cash Basis: Always $0