Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,000,000 per year. The company estimates that on average it will incur losses of $800,000 per year. During 2008, $350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2008?
A) $350,000 in losses and no insurance expense
B) $350,000 in losses and $450,000 in insurance expense
C) $0 in losses and $800,000 in insurance expense
D) $0 in losses and $1,000,000 in insurance expense

Question

Quizplus · Accepted Answer

Wellman Company self-insures, meaning it does not pay insurance premiums to an external company but instead covers its own losses. Therefore, for 2008, it should recognize the actual losses incurred, which amount to $350,000, and not any insurance expense since it does not pay premiums to an external insurer.

Wellman Company Self Insures Its Property for Fire and Storm