Introduction:
TechCo, the company that manufactures electronic gadgets, realized they needed insurance to protect their factory from potential risks, such as fire or theft. Insurance would give them peace of mind knowing that their assets were protected.
The Situation:
TechCo decided to purchase an insurance policy to cover their factory and its contents. The insurance premium for one year was $12,000. The coverage started immediately upon purchasing the policy.
The Decision:
Instead of paying the insurance premium in advance, TechCo chose to pay the full amount as soon as the coverage became effective.
The Numbers:
Total cost of insurance: $12,000
Payment method: Full payment upon the coverage becoming effective.
Question for You:
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make the following journal entries:
When the insurance coverage becomes effective and payment is made:
Debit: Insurance Expense for the cost of the insurance coverage.
Credit: Cash/Bank for the amount paid.
Can You Figure Out the Journal Entries?
Based on the information provided:
When TechCo receives the insurance coverage and makes the payment:
Debit: Insurance Expense for $12,000
Credit: Cash/Bank for $12,000
This case study illustrates how businesses manage their indirect expenses, such as insurance, by recording them as expenses when the coverage starts and paying the provider to ensure their assets are protected.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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