Hazard Ltd writes insurance policies to cover the risk of fire in northern New South Wales.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Hazard Ltd is aware that the fire risk is eight times greater in January,February and March than it is the rest of the year.The appropriate discount rate for Hazard Ltd is 12%.If the total amount of insurance premiums to be received is $50 000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

Question

Quizplus · Accepted Answer

AASB 1023 requires revenue to be recognized when it is earned and can be reliably measured. In this case, since the fire risk is eight times greater in January, February and March, the revenue should be recognized proportionally higher in those months. Therefore, $12 121 should be recognized in each of those months ($50,000 / 12 months x 8/12 = $12,121) and $1515 should be recognized in each of the other months ($38,000 / 9 months = $4,222; $4,222 / 2.8 = $1515). This pattern of revenue recognition ensures that revenue is recognized when it is earned and can be reliably measured.

Hazard Ltd Writes Insurance Policies to Cover the Risk of Fire