In December 2013, 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 2014 flagged this transaction.

Question

Quizplus · Accepted Answer

The transaction where Kojak Insurance Co. recorded the full $500,000 in insurance premium revenue as soon as they received the premiums is an accounting error. Insurance companies are required to recognize revenue over the coverage period rather than recognizing it all at once. Therefore, Kojak needs to correct this error by adjusting their accounting records to recognize revenue over the policy period.