[Biff-1955-Tannen]

I don’t understand why we don’t subtract the $6,000 of dividends that was used to increase the cash surrender value…

The excess of premium over expense = the increase in cash surrender value. During the year the cash surrender value increased $21,000. We know we can attribute $6,000 of that increase due to the dividends. Which means that only $15,000 of the increase in cash surrender value is due to excess of premiums over expense. Correct? So why do they not deduct the $6,000 out of the $21,000 increase? Which would then give you an answer of $40,000 – $15,000 = $25,000. This just doesn’t make sense to me.

In 20X1, Chain, Inc., purchased a $1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ending December 31, 20X6, follows:

Cash surrender value (01/01/X6) $ 87,000

Cash surrender value (12/31/X6) 108,000

Annual advance premium paid (01/01/X6) 40,000

During 20X6, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 20X6?

A.

$40,000

Incorrect B.

$25,000

C.

$19,000

D.

$13,000

Since the cash surrender value of a life insurance policy is an asset, then the insurance expense is only the premium less the increase in the asset (surrender value).

Annual advance premium payment $40,000

Less increase in cash surrender value

($108,000 – $87,000) 21,000

---

Life insurance expense for 20X6 $19,000

=======

The increase in cash surrender value is deducted because cash surrender value of the insurance policy is an asset. Also, the increase in this asset already includes the effect of the $6,000 in dividends applied to it in 20X6.

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[Biff-1955-Tannen]

Bump

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[monikernc]

i googled and found the wiley q&a with the journal entry – hope this helps. question 53

https://tinyurl.com/hr2lwse

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[Biff-1955-Tannen]

“Therefore, part of the premium paid is not expense, but a payment to increase the CSV” So is that saying that the $6,000 dividends is part of the $40,000 premiums as well? If so, that would make sense, but this question is incredibly misleading.

Also thank you monikernc

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[monikernc]

no, i think the dividends are declared on the policy by the insurance company and applied to increase the cash surrender value of the policy. the way i read it, is you back into the expensed amount so that the correct cash surrender value (an asset) can be reported on the balance sheet. the $40,000 premium was actual cash paid to the insurance company that resulted in a portion of the increase in the CSV. the expensed amount is partially offset by the CSV increase that results from applying the accrued dividends to the policy.
i really tried to clean up that explanation.

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[Biff-1955-Tannen]

Now I'm back to where I started. Confused as to why we don't subtract out the $6,000.

“the $40,000 premium was actual cash paid to the insurance company that resulted in a portion of the increase in the CSV.”
This goes back to what I first said about only a portion of the 21,000 increase in CSV is due to the excess of premiums over expense. The other portion is due to the 6,000 dividends being applied directly to the CSV. So I don't get why we wouldn't back the 6,000 out of the 21,000 increase.

So if we break down the 21,000 increase it would look like this:
21,000 increase in CSV = 6,000 dividends + 15,000 excess premium over expense. Would it not?

So then to find what the expense is we would use:
40,000 premium – 15,000 excess premium over expense = $25,000 expense.

Do you see my thinking? This is just blowing my mind, I don't get it.

AUD 93 Jan 16
BEC 83 Feb 16
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[monikernc]

i can't explain it better than the wiley breakdown. it shows the insurance expense was $25,000 but the second je for the dividends reduced it to $19,000. the csv increased $15,000 and cash paid out for the premium is $40,000. i like the way wiley shows the dual entries.
i hate that it is driving you nuts.

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[Biff-1955-Tannen]

Ok how about this. Are we saying that because the $6,000 in dividends were never really in our control (they were applied directly to the CSV), we don't count it as dividend revenue, instead we use it to offset the expense.

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[monikernc]

yes, applying the dividends directly to the csv reduced the expense.

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[Biff-1955-Tannen]

I feel so much better

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[monikernc]

i am pleased to hear that.

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