In year one W Corporation paid an annual premium of $6,000 on an insurance policy covering its president.The cash surrender value of the policy increased by $2,500.The policy has a $650,000 face value and lists W Corporation as the beneficiary.In year 10, when the cash surrender value of the policy has grown to $50,000, the president dies, before the corporation is required to pay the annual premium.Which statement(s) of the following is(are) true?

Question

Quizplus · Accepted Answer

A) In year one, the corporation paid $6,000 for the insurance premium, which is a deductible expense, thus decreasing E&P. The increase in cash surrender value is not taxable and does not affect E&P. Therefore, the net effect of the premium paid and the increase in cash surrender value is a decrease to E&P of $3,500 ($6,000 - $2,500).
B) The corporation would have paid a total of $60,000 in premiums ($6,000 per year for 10 years). However, in year 10, before paying the premium, the president died and the corporation received the policy's face value of $650,000 tax-free. Therefore, the net effect of the premiums paid and the increase in cash surrender value is a decrease to E&P of $4,000 ($60,000 - $50,000).
C) The corporation is the beneficiary of the policy and will receive the policy's face value of $650,000 tax-free since it was listed as the beneficiary. This amount will be added to E&P. However, since the corporation paid $60,000 in premiums over the 10-year period, only $600,000 will be added to E&P ($650,000 - $60,000).
Therefore, all of the statements are true.

In Year One W Corporation Paid an Annual Premium of $6,000