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Contents:
Insurance policy method of
depreciation is somewhat alike the
depreciation or sinking fund method. The only
difference is that the annual depreciation instead
of investing in government papers or gilt-edged
securities is paid as as premium to an insurance
company, who issues an insurance policy equivalent
to cost of asset. At the end of the life of asset,
insurance company pays money covered by the policy
and a new asset is purchased with it.
| |
|
$ |
$ |
| When premium is paid at the end
of the year: |
|
|
|
| Insurance policy a/c |
Dr. |
XXXX |
|
| Cash a/c |
|
|
XXXX |
| |
|
|
|
| When depreciation is charged
(equal to premium): |
|
|
|
| Profit and loss a/c |
Dr. |
XXXX |
|
|
Depreciation fund a/c |
|
|
XXXX |
| |
|
|
|
| When policy money is received on
maturity: |
|
|
|
| Cash a/c |
Dr. |
XXXX |
|
| Insurance
policy a/c |
|
|
XXXX |
| |
|
|
|
| To transfer the excess amount
received over premium: |
|
|
|
| Insurance policy |
Dr. |
XXXX |
|
|
Depreciation fund a/c |
|
|
XXXX |
| |
|
|
|
| When asset is retired: |
|
|
|
| Depreciation fund a/c |
Dr. |
XXXX |
|
| Asset a/c |
|
|
XXXX |
| |
|
|
|
| When scrap is sold: |
|
|
|
| Cash a/c |
Dr. |
XXXX |
|
| Asset a/c |
|
|
XXXX |
On 1st January 2003 a business
purchased a three years lease of premises for
$10,000 and it was decided provision for
replacement of the lease by means of an
insurance policy purchased for an annual premium
of $3,200.
Required: Prepare journal
entries.
Solution:
| Year
2003 |
|
|
$ |
$ |
| Jan. 1 |
Leasehold a/c |
Dr. |
10,000 |
|
| |
Bank a/c |
|
|
10,000 |
| |
(For lease purchased for three
years) |
|
|
|
| |
|
|
|
|
| Jan. 1 |
Depreciation fund policy a/c |
|
3,200 |
|
| |
Bank a/c |
|
|
3,200 |
| |
(For lease policy taken for
replacement) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Profit and loss a/c |
|
3,200 |
|
| |
Depreciation fund a/c |
|
|
3,200 |
| |
(For charge of premium against
profits) |
|
|
|
| |
|
|
|
|
| Year
2004 |
|
|
|
|
| Jan. 1 |
Depreciation fund policy a/c |
|
3,200 |
|
| |
Bank a/c |
|
|
3,200 |
| |
(For premium paid on lease policy) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Profit and loss a/c |
|
3,200 |
|
| |
Depreciation fund a/c |
|
|
3,200 |
| |
(For charge of premium against
profits) |
|
|
|
| |
|
|
|
|
| Year
2005 |
|
|
|
|
| Jan. 1 |
Depreciation fund policy a/c |
|
3,200 |
|
| |
Bank a/c |
|
|
3,200 |
| |
(For premium paid on lease policy) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Profit and loss a/c |
|
3,200 |
|
| |
Depreciation fund a/c |
|
|
3,200 |
| |
(For charge of premium against
profits) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Depreciation fund a/c |
|
10,000 |
|
| |
Leasehold
a/c |
|
|
10,000 |
| |
(For lease property retired) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Bank a/c |
|
10,000 |
|
| |
Depreciation fund policy a/c |
|
|
10,000 |
| |
(For policy money received on
maturity) |
|
|
|
| |
|
|
|
|
| Dec. 31 |
Depreciation fund policy a/c |
|
400 |
|
| |
Depreciation fund a/c |
|
|
400 |
| |
(Being transfer of policy account to
depreciation fund account) |
|
|
|
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