A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred).The basic premium is $150,000 for the 2-year policy payable in advance.At the end of the first year the hospital estimates that it will have to pay an additional $40,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $50,000 as a result of claims filed in the second year.The amount of insurance expense that should appear on the financial statements at the end of the first year should be

Question

Quizplus · Accepted Answer

At the end of the first year, the hospital estimates that it will have to pay an additional $40,000 in premiums as a result of claims filed in the current year. Therefore, the total premium for the first year is $150,000 + $40,000 = $190,000. This amount should be recognized as insurance expense on the financial statements.

The additional $50,000 in premiums estimated for the second year is not relevant for the financial statements at the end of the first year as it pertains to claims filed in the future. Thus, the correct answer is B.

A Hospital Carried a 2-Year Malpractice Insurance Policy That Allows