Question

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan:

Answer 1

Answer:

Recognize an income/loan repayment of $1,300, and cancel the debt of $200 from the earlier recognition of income

Explanation:

Swan would only recognize an income/loan repayment of $1,300 having already recognized an initial income of $200 of the $1,500 owed before the death of the customer.

Accounting entries would be as follows.

Debit Bank account: $1,500

Credit income/loan repayment account: :1,300

Credit receivables: $200.

The credit of $200 in receivables would be treated as shown above due to the income of $200 already recognised and which would have been treated as follows when it was recognized,

Dr: receivables $200

Cr. interest earned $200,