[number_cruncher_24]

Hi – I was wondering if someone could help me with an accounting question – here’s the scenario: Our fiscal year ends on May 31. We received a bill for our insurance policy on May 20. The bill is for insurance for the period of 6/15 through 12/15. We enter all bills into the system when received. When I enter this bill into the system, it will result in a credit to A/P but which account should be debited? It’s not an expense for the current fiscal year because it is for a future period, but we won’t pay it until after 5/31, so it’s not a prepaid yet either.

[acamp]

(or risk rating, depending on the type of liability)

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

(or risk rating, depending on the type of liability)

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Anonymous]

Then you adjust the actual expense at the end of the year.

[Anonymous]

Then you adjust the actual expense at the end of the year.

[Mayo]

What if they sell the asset?

I'm assuming you mean before 6/15? Then you cancel the policy and unwind the transaction.

It's akin to buying a building via a loan, in which the building insurance is part of the transaction but a separate asset. Then you sell the building a day later, cancel the policy, and unwind the part of the loan used to pay the policy.

What if they are required to hire 3rd party valuation specialist who declares the value of the insured asset to be significantly impaired from the insured amount and the insurance company will only insure up to the appraised value, which consequently will reduce the premium on the policy which in turn will reduce the phantom prepaid asset?!

And? What's wrong with that? What happens if you pay your policy in advance, assets gets impaired, premiums change?

In either case you adjust the balance of the prepaid asset. If premiums go down, then you are compelled to pay less, in which case you are owed a balance by the insurance company and your prepaid insurance goes down. Same thing with an unpaid policy, except no money has changed hands yet. Your payable and asset both go down in value.

Mayo, BBA, Macc

[Mayo]

What if they sell the asset?

I'm assuming you mean before 6/15? Then you cancel the policy and unwind the transaction.

It's akin to buying a building via a loan, in which the building insurance is part of the transaction but a separate asset. Then you sell the building a day later, cancel the policy, and unwind the part of the loan used to pay the policy.

What if they are required to hire 3rd party valuation specialist who declares the value of the insured asset to be significantly impaired from the insured amount and the insurance company will only insure up to the appraised value, which consequently will reduce the premium on the policy which in turn will reduce the phantom prepaid asset?!

And? What's wrong with that? What happens if you pay your policy in advance, assets gets impaired, premiums change?

In either case you adjust the balance of the prepaid asset. If premiums go down, then you are compelled to pay less, in which case you are owed a balance by the insurance company and your prepaid insurance goes down. Same thing with an unpaid policy, except no money has changed hands yet. Your payable and asset both go down in value.

Mayo, BBA, Macc

[Mayo]

@Acamp,

What do you do if you have a commercial plane with a $30,000 a year premium insurance policy. The policy is effective for ten years, and premiums are due on 6/15 of each year in order for the policy to stay in place.

You telling me that you feel comfortable not recognizing a prepaid asset and related payable of $30,000 for the insurance policy? Edit: What if it was a major airline like Delta, and these policies are a huge part of their Balance Sheet in both a liability and asset sense.

Keeping in mind that the report date is 5/31.

Mayo, BBA, Macc

[Mayo]

@Acamp,

What do you do if you have a commercial plane with a $30,000 a year premium insurance policy. The policy is effective for ten years, and premiums are due on 6/15 of each year in order for the policy to stay in place.

You telling me that you feel comfortable not recognizing a prepaid asset and related payable of $30,000 for the insurance policy? Edit: What if it was a major airline like Delta, and these policies are a huge part of their Balance Sheet in both a liability and asset sense.

Keeping in mind that the report date is 5/31.

Mayo, BBA, Macc

[Anonymous]

I have an audit client, a small governmental agency, that has business activity (utility dept) total revenue of $433,000 and insurance expense of $16,500. That's not immaterial, no matter how you look at it. If they don't have a prepaid and a payable booked, then you can bet your next paycheck, that I'm going to make them book a contingent liability to cover their potential loss if they aren't covered.

[Anonymous]

I have an audit client, a small governmental agency, that has business activity (utility dept) total revenue of $433,000 and insurance expense of $16,500. That's not immaterial, no matter how you look at it. If they don't have a prepaid and a payable booked, then you can bet your next paycheck, that I'm going to make them book a contingent liability to cover their potential loss if they aren't covered.

[stoleway]

This thread is very interesting, im trying not to stir the hornet's nest. Can I just advice the OP to reject the invoice and tell the insurance company to send the invoice at the right time? lol…honestly, I love this thread, it shows how creative we can be.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

This thread is very interesting, im trying not to stir the hornet's nest. Can I just advice the OP to reject the invoice and tell the insurance company to send the invoice at the right time? lol…honestly, I love this thread, it shows how creative we can be.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Anonymous]

Hahahahaha

If I heard correctly, I believe that Lax oops I mean Herd just attempted to insult the entire group. I'm gonna go out on a limb here and say that I am not the only one on this thread that is a real auditor with a real public accounting firm. A/P clerk probably has some sweet hours though. 🙂

Full disclosure: I am not sure the proper handling of this transaction. I can relate to both major schools of thought. However, I do know that it is a little silly to blindly discount an entire group of well educated experts.

[Anonymous]

Hahahahaha

If I heard correctly, I believe that Lax oops I mean Herd just attempted to insult the entire group. I'm gonna go out on a limb here and say that I am not the only one on this thread that is a real auditor with a real public accounting firm. A/P clerk probably has some sweet hours though. 🙂

Full disclosure: I am not sure the proper handling of this transaction. I can relate to both major schools of thought. However, I do know that it is a little silly to blindly discount an entire group of well educated experts.

[jeff]

Plug the G/L to APIC and call it a day.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Author]

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