In December 2009, Kojak Insurance Co. received $500,000 in premiums for a two-year property insurance policy. The company recorded the transaction by debiting cash and crediting insurance premium revenue for the full amount. An internal audit conducted in early 2010 flagged this transaction.

Question

Quizplus · Accepted Answer

Kojak needs to correct an accounting error because the revenue should be recognized over the period of the insurance coverage, not all at once. The correct accounting treatment would involve recognizing the revenue over the two-year period, adjusting for unearned revenue.