300597 Flashcards
An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by:
recording a memorandum entry only.
decreasing a deferred charge.
increasing investment income.
decreasing annual insurance expense.
decreasing annual insurance expense.
Typical journal entry for payment of life insurance premiums (no increase in cash surrender value):
Dr. Cr. Insurance expense xx Cash xx
As the cash surrender value of the policy started to increase, the typical journal entry for payment of life insurance premiums would become:
Dr. Cr. Cash surrender value of life insurance x Insurance expense xx Cash xx Note: In each periodic entry as cash surrender value increases, insurance expense decreases.
Whole Life Contract
A whole life contract is an insurance policy that may be kept in force for a person’s entire life with payment of one or more premiums. A benefit is paid at the death of the insured. Nonforfeiture benefits also accrue. The premiums pay for protection in case the insured dies, and also builds cash value with the remaining premium. It is generally a low-return investment.
2253.14
Cash surrender value: Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is the amount of such premiums paid less the increase in cash surrender value during the period. For example, if Company X pays an annual premium of $3,000 on a policy covering its president, the entry during a year when the cash surrender value increased by $600 would be:
Insurance Expense 2,400
Cash Surrender Value 600
Cash 3,000
2253.15
At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:
Cash XXX
Cash Surrender Value XXX
Gain from Proceeds of Life Insurance XXX
