Question

Edible Chemicals Corporation owns a $2 million whole life insurance policy on the life of its CEO, naming Edible Chemicals as beneficiary. The annual premiums are $72,000 and are payable at the beginning of each year. The cash surrender value of the policy was $22,000 at the beginning of 2018.
1. & 2. Prepare the appropriate 2018 journal entries to record insurance expense and the increase in the investment assuming the cash surrender value of the policy increased according to the contract to $28,200. The CEO died at the end of 2018.

Answer 1

Answer:

1. Dr Insurance expense $65,800

Dr Cash surrender value of life insurance $6,200

Cr Cash $72,000

2. Dr Cash $2000,000

Cr Cash surrender value of life insurance $28,200

Cr Gain on life insurance settlement $1,971,800

Explanation:

1. & 2. Preparation of the appropriate 2018 journal entries to record insurance expense and the increase in the investment

1. Dr Insurance expense $65,800

($72,000+$22,000-$28,200)

Dr Cash surrender value of life insurance $6,200

($72,000-$65,800)

Cr Cash $72,000

2. Dr Cash $2000,000

Cr Cash surrender value of life insurance $28,200

Cr Gain on life insurance settlement $1,971,800

($2000,000-$28,200)