Pope, Inc. has life insurance policies on its officers' lives. Annual premiums amount to $5,000. At the end of 2017, the cash surrender value of the policies totaled $18,200. Dividends received by Pope from the insurance company amounted to $500 in 2017. The insurance expense recognized by Pope in 2017 was $3,500. What was the amount of cash surrender value of these policies on January 1, 2017?

Question

Quizplus · Accepted Answer

The cash surrender value at the beginning of the year can be calculated by subtracting the net increase in cash surrender value from the ending cash surrender value. The net increase is the difference between the insurance expense recognized ($3,500) and the dividends received ($500), which is $3,000. Therefore, the cash surrender value at the beginning of the year was $18,200 (ending value) - $3,000 (net increase) = $15,200. However, this calculation was incorrect in determining the initial cash surrender value. The correct approach involves understanding that the increase in cash surrender value is part of the calculation for determining the insurance expense. The correct calculation should consider the premiums paid and the increase in cash surrender value to find the starting value.The correct calculation is as follows: The insurance expense recognized ($3,500) is the net effect of the premiums paid ($5,000) minus the increase in cash surrender value and dividends received. To find the increase in cash surrender value, we adjust the premiums by the insurance expense recognized and the dividends: $5,000 (premiums) - $3,500 (expense) - $500 (dividends) = $1,000. This $1,000 represents the increase in cash surrender value over the year. Therefore, the cash surrender value at the beginning of the year was $18,200 (ending value) - $1,000 (increase) = $17,200.

Pope, Inc Has Life Insurance Policies on Its Officers' Lives