1. CIRCUMSPECT CAUTIOUS Insurance Co. offers fire insurance.

On January 1, 20x1,
CIRCUMSPECT received notice from its broker of a sale of one-year fire insurance for a
premium of ₱4,000. The broker’s commission is 10%. The entry to record the transaction
most likely will include a
a. debit to “Insurance receivable – direct” for ₱4,000
b. credit to commission for ₱400
c. credit to “Gross premiums revenue – direct” for ₱3,600.
d. credit to “Gross premiums revenue – direct” for ₱4,000.

Journal entries - Reinsurance contract written

2. JALOPY Insurance Co. writes a reinsurance contract for OLD CAR Insurance Co. for a
premium of ₱4,000. Commission expense incurred on the reinsurance contract issued is 10%.
The entry to record the transaction most likely will include a
a. debit to “Insurance receivable – direct” for ₱3,600
b. credit to commission for ₱400
c. credit to “Gross premiums revenue – assumed” for ₱3,600.
d. credit to “Gross premiums revenue – assumed” for ₱4,000.

Journal entries - Reinsurance contract (Books of cedant and Books of reinsurer)

Use the following information for the next two questions:
POSTULATE Insurance Co. offers fire insurance. On January 1, 20x1, POSTULATE received
notice from its broker of a sale of one-year fire insurance for a premium of ₱4,000. The broker’s
commission is 10%.

POSTULATE Insurance Co. then ceded 80% of the insurance contract with Mr. Joe to
DEMAND Insurance Co. Commission earned on the reinsurance is ₱320. Per agreement,
POSTULATE Insurance Co. shall withhold half of the premiums due to DEMAND Insurance
Co.

3. The journal entry on the books of POSTULATE to record the transaction with DEMAND
most likely will include a
a. debit to “Insurance receivable – direct” for ₱4,000
b. credit to premiums ceded to reinsurers for ₱3,200
c. credit to “Funds held for reinsurer” for ₱3,600.
d. credit to “Gross premiums revenue – assumed” for ₱3,200.

4. The journal entry on the books of DEMAND to record the transaction with POSTULATE
most likely will include a
a. debit to “Insurance receivable – direct” for ₱1,280
b. debit to premiums ceded to reinsurers for ₱3,200
c. credit to commission for ₱320.
d. credit to “Gross premiums revenue – assumed” for ₱3,200.

24th Method – Policy issued at the beginning of period

Use the following information for the next six questions:
On January 1, 20x1, SPECULATE THINK Insurance Co. issues a one-year, fire insurance
contract for a total premium of ₱48,000.

5. How much is the earned portion of the premium for the month ended January 31, 20x1?
a. 2,000 b. 46,000 c. 4,000 d. 44,000

6. How much is the unearned portion of the premium for the month ended January 31, 20x1?
a. 2,000 b. 46,000 c. 4,000 d. 44,000

7. How much is the earned portion of the premium for the year ended December 31, 20x1?
 a. 2,000 b. 46,000 c. 4,000 d. 44,000

8. How much is the unearned portion of the premium for the year ended December 31, 20x1?
a. 2,000 b. 46,000 c. 4,000 d. 44,000

9. If SPECULATE uses nominal accounts to initially record income, the journal entry on
January 1, 20x1 to recognize the gross premium will mostly likely include a
a. credit to “Provision for unearned premium” for ₱2,000.
b. credit to “Provision for unearned premium” for ₱46,000.
c. credit to “Provision for unearned premium” for ₱44,000.
d. credit to “Gross premiums revenue – direct” for ₱48,000.

10. If SPECULATE uses nominal accounts to initially record income, the adjusting entry on
December 31, 20x1 to recognize the adjustment to the gross premium will most likely
include a
a. credit to “Provision for unearned premium” for ₱2,000.
b. credit to “Provision for unearned premium” for ₱46,000.
c. debit to “Provision for unearned premium” for ₱2,000.
d. debit to “Provision for unearned premium” for ₱46,000.

24th Method – Policy issued during the period

Use the following information for the next two questions:
In March 20x1, SNITCH STEAL Insurance Co. issues a one-year, fire insurance contract for a
total premium of ₱48,000.

11. How much is the earned portion of the premium for the year ended December 31, 20x1?
a. 38,000 b. 10,000 c. 42,000 d. 6,000

12. How much is the unearned portion of the premium for the year ended December 31, 20x1?
a. 38,000 b. 10,000 c. 42,000 d. 6,000

24th Method – Premiums ceded

Use the following information for the next two questions:
In April 20x1, TAUNT JEER AT Insurance Co. writes fire insurance policies for a total
premium of ₱144,000. During the same period, total premiums of ₱48,000 were ceded to
reinsurers.

13. How much is the net premium earned for the year ended December 31, 20x1?
a. 68,000 b. 90,000 c. 102,000 d. 54,000

14. How much is the balance of provision for unearned premiums as of December 31, 20x1?
a. 28,000 b. 6,000 c. 12,000 d. 42,000

24th Method – Adjustments to premiums earned

15. During 20x1, PETITE SMALL Insurance Co. wrote fire insurance policies for a total
premium of ₱20,000,000, ₱12,000,000 of which were ceded to reinsurers. The following are
the balances in the provision for unearned premiums:
Provision for Premiums ceded to Provision for unearned
  unearned premiums reinsurers premiums - Net
a b c=a-b
Balance, Jan. 1 8,000,000 4,000,000 4,000,000
Balance, Dec.
31 11,200,000 4,800,000 6,400,000

How much are the net premiums earned during the period?
a. 18,600,000 b. 16,800,000 c. 12,100,000 d. 5,600,000
Marine cargo risks
Use the following information for the next two questions:
During the year, FATUITY FOOLISHNESS Insurance Co. wrote insurance policies covering
marine cargo risks. Premiums from these policies are shown below:
Gross premiums Premiums Ceded
January 240,000 144,000
February 400,000 328,000
March 460,000 280,000
April 432,000 340,000
May 308,000 216,000
June 424,000 332,000
July 280,000 200,000
August 228,000 132,000
September 388,000 304,000
October 380,000 296,000
November 584,000 476,000
December 200,000 136,000
Totals 4,324,000 3,184,000

16. How much is the provision for unearned premiums as of December 31, 20x1?
a. 172,000 b. 127,000 c. 182,000 d. 197,000

17. How much are the net premiums earned for the year ended December 31, 20x1 assuming the
total gross premiums written and premiums ceded in November and December 20x0 totaled
₱60,000 and 40,000, respectively,?
a. 968,000 b. 988,009 c. 986,000 d. 988,000

Comprehensive
Use the following information for the next two questions:
Premiums on insurance policies written by RECALCITRANT UNRULY Insurance Co. during
its first year of operations are shown below:
Types of non-life insurance
  Fire Motor Car Bonds Marine Cargo
Gross Premiums (Direct and Assumed)
January 1,360,000 480,000 120,000 256,000
February 1,000,000 240,000 8,000 400,000
March 1,440,000 288,000 48,000 460,000
April 2,520,000 300,000 44,000 720,000
May 1,120,000 192,000 9,600 288,000
June 1,520,000 296,000 8,000 652,000
July 1,600,000 276,000 4,000 280,000
August 1,440,000 272,000 24,000 220,000
September 800,000 320,000 28,000 392,000
October 1,200,000 256,000 16,000 380,000
November 1,120,000 252,000 24,000 560,000
December 1,440,000 180,000 16,000 200,000
Premium Ceded
January 816,000 288,000 72,000 153,600
February 600,000 144,000 4,800 240,000
March 864,000 172,800 28,800 276,000
April 1,512,000 180,000 26,400 432,000
 May 672,000 115,200 5,760 172,800
June 912,000 177,600 4,800 391,200
July 960,000 165,600 2,400 168,000
August 864,000 163,200 14,400 132,000
September 480,000 192,000 16,800 235,200
October 720,000 153,600 9,600 228,000
November 672,000 151,200 14,400 336,000
December 864,000 108,000 9,600 120,000

18. How much is the balance of the “Provision for unearned premiums” on December 31, 20x1?
a. 10,405,768 b. 6,243,460 c. 4,162,380 d. 4,162,308

19. How much are the net premiums earned for the period?
a. 14,663,832 b. 8,798,300 c. 5,865,532 d. 5,865,523

Subsequent recognition of DAC

Use the following information for the next three questions:
In March 20x1, PROP SUPPORT Insurance Co. issues a one-year, fire insurance contract. The
costs of commission incurred on the issuance of the contract amounted to ₱48,000.

20. How much of the acquisition cost is recognized in profit or loss during the period?
a. 38,000 b. 10,000 c. 42,000 d. 6,000

21. How much is the balance of the deferred acquisition costs to be presented in the statement of
financial position on December 31, 20x1?
a. 38,000 b. 10,000 c. 42,000 d. 6,000

22. The adjusting journal entry on December 31, 20x1 will most likely include a
a. credit to commission income for ₱10,000.
b. debit to commission expense for ₱10,000.
c. credit to “Deferred acquisition costs” for ₱10,000.
d. debit to “Deferred acquisition costs” for ₱10,000.

Journal entries – Benefits and claims

Use the following information for the next three questions:
Fact pattern
PROD URGE Insurance Co. offers fire insurance. On December 1, 20x1, PROD Co. paid a
₱400,000 claim of a policyholder for losses incurred on his insured property.

Case #1: Claims paid

23. The journal entry to record the transaction described above will most likely include a
a. debit to Cash for ₱400,000
b. debit to “Gross benefits and claims” for ₱400,000
c. credit to “Gross benefits and claims” for ₱400,000
d. a and c

Case #2: Claims incurred but not yet paid

24. Use the information in the fact pattern above except that the claim of the policyholder is not
yet paid. The entry will most likely include a
a. debit to Cash for ₱400,000
b. credit to “Gross benefits and claims” for ₱400,000
c. credit to “Provision for claims” for ₱400,000
d. a and c

Case #3: Claims incurred but not reported (IBNR)

25. Use the information in the fact pattern above except that PROD Insurance Co. was made
aware of the loss event but the policyholder did not yet file a notice of claim to PROD. The
entry will most likely include a
a. debit to “Gross benefits and claims” for ₱400,000
b. credit to “Provision for claims” for ₱400,000
c. credit to “Provision for claims - IBNR” for ₱400,000
d. a and c

Journal entries – Liability adequacy test

26. PUNKY BURNING SLOWLY Insurance Co. is performing its year-end “liability adequacy
test” for its insurance liabilities. The following amounts were determined:
  Carrying amount Current estimate
Insurance contracts liabilities 5,200,000 5,000,000
Deferred acquisition costs 800,000

The year-end adjusting entry will most likely include

a. debit to “Provision for premium deficiency” for ₱200,000
b. debit to “Provision for premium deficiency” for ₱600,000
c. credit to “Provision for premium deficiency” for ₱600,000
d. no adjusting entry will be made

Journal entries – Single premium

27. PERPETUAL EVERLASTING Insurance Co. offers life insurance. On January 1, 20x1,
PERPETUAL issues life insurance for a single premium of ₱4,000. The journal entry to
record the transaction will most likely include a
a. debit to “Insurance receivable – direct” for ₱4,000.
b. credit to “Provision for unearned premium” for ₱4,000.
c. credit to “Gross premiums revenue – assumed” for ₱4,000.
d. credit to “Gross premiums revenue – direct” for ₱4,000.

Journal entries – Regular premium

Use the following information for the next two questions:
GRISLY HORRIBLE Insurance Co. offers life insurance. The life insurance policies written by
GRISLY require recurring regular payments of ₱4,000 due at the beginning of each month.

28. The journal entry on February 1, 20x1 to record the renewal of an existing contract most
likely include a
a. debit to Cash for ₱4,000.
b. credit to “Provision for unearned premium” for ₱4,000.
c. credit to “Gross premiums revenue – assumed” for ₱4,000.
d. credit to “Gross premiums revenue – direct” for ₱4,000.

29. The journal entry on February 7, 20x1 to record the collection of the regular premium will
mostly include a
a. credit to “Insurance receivable – direct” for ₱4,000.
b. credit to “Provision for unearned premium” for ₱4,000.
c. credit to “Gross premiums revenue – assumed” for ₱4,000.
d. credit to “Gross premiums revenue – direct” for ₱4,000.

Journal entries - Death claims

Use the following information for the next two questions:
CYNICAL SARCASTIC Insurance Co. offers life insurance. On January 1, 20x1, CYNICA
receives notification of the death of a policyholder. The sum insured is ₱4,000,000.

30. The journal entry to record the accrual of the claim will most likely include a
a. credit to Cash for ₱4,000,000
b. debit to “Gross benefits and claims” for ₱4,000,000
 c. credit to “Gross benefits and claims” for ₱4,000,000
d. a and b

31. The beneficiaries submitted the death certificate and other required documents and the claim
is settled on February 8, 20x1. The on February 9, 20x1 will most likely include a
a. credit to Cash for ₱4,000,000
b. debit to “Gross benefits and claims” for ₱4,000,000
c. credit to “Gross benefits and claims” for ₱4,000,000
d. a and b

Journal entries - Surrenders

32. WOOZY DIZZY Insurance Co. offers life insurance. On January 1, 20x1, a policyholder
cancels a life insurance contract and is paid the cash surrender value of ₱800,000. The entry
to record the transaction will most likely include a
a. credit to Cash for ₱800,000
b. debit to “Gross benefits and claims” for ₱800,000
c. credit to “Gross benefits and claims” for ₱800,000
d. a and b

KEY TO CORRECTIONS

1. D 11. A 21. B 31. A

2. D 12. B 22. D 32. D

3. C 13. A 23. B

4. D 14. A 24. C

5. A 15. D 25. D

6. B 16. A 26. C

7. B 17. D 27. D

8. A 18. D 28. D

9. D 19. C 29. A
 10. A 20. A 30. B

Solutions:
Journal entries - Direct insurance contract
1. D
Solution:

Jan. 1, Insurance receivable – direct 3,600

20x1
Commission expense 400

Gross premiums revenue – direct 4,000

Journal entries - Reinsurance contract written

2. D
Solution:

Jan. 1, Insurance receivable – assumed 3,600

20x1
Commission expense 400

Gross premiums revenue – assumed 4,000

CORRECTION: Choice (c) should be “credit to ‘Funds held for reinsurer’ for ₱1,600” and not
₱3,600.
3. C
Solution:
Premiums ceded to reinsurers 3,200

Commission income 320

Funds held for reinsurer 1,600

Due to reinsurer 1,280

4. D
Solution:
Insurance receivable – assumed 1,280

Funds held by cedant 1,600

Commission expense 320

Gross premiums revenue – assumed 3,200

5. A
Solution:

Gross premium 48,000

Multiplied by: 1/24

Earned portion - Jan. 31, 20x1

2,000
6. B
Solution:

Gross premium 48,000

Multiplied by: 23/24

Unearned portion - Jan. 31,

20x1 46,000

7. B
Solution:

Gross premium 48,000

Multiplied by: 23/24

Earned portion - Dec. 31, 20x1

46,000

8. A
Solution:

Gross premium 48,000

Multiplied by: 1/24

Unearned portion - Dec. 31, 20x1 2,000

9. D
Solution:
The entry on January 1, 20x1 is as follows:

Jan. 1, Insurance receivable – direct 48,000

20x1
Gross premiums revenue –

direct 48,000

10. A
Solution:

Dec. 31, Gross premiums revenue – direct 2,000

20x1
Provision for unearned

premiums 2,000

11. A
Solution:

Gross premium 48,000

Multiplied by: 19/24

38,00
Earned portion - Dec. 31, 20x1
0
12. B
Solution:

Gross premium 48,000

Multiplied by: 5/24

10,00
Unearned portion - Dec. 31, 20x1
0

13. A
Solution:

Gross premium 144,000

Multiplied by: 17/24

Earned portion - Dec. 31, 20x1 102,000

Premiums ceded (48,000)

Multiplied by: 17/24

Earned portion by reinsurers - Dec. 31, 20x1 (34,000)

Net premium earned - Dec. 31, 20x1 (102,000 – 34,000) 68,000

14. A
Solution:

Gross premium 144,000

Multiplied by: 7/24

Unearned portion - Dec. 31, 20x1 42,000

Premiums ceded (48,000)

Multiplied by: 7/24

Unearned portion by reinsurers - Dec. 31, 20x1 (14,000)

Provision for unearned premiums, Net - Dec. 31, 20x1 28,000

15. D
Solution:

Gross premiums 20,000,000

Change in provision for unearned premiums (3,200,000)

 – increase in unearned premium (11.2M – 8M)

Gross premiums - earned 16,800,000

Premiums ceded to reinsurers 12,000,000

Change in provision for unearned premiums

– increase in unearned premium (4.8M – 4M) (800,000)

Premiums ceded to reinsurers – earned 11,200,000

Net premiums earned (16.8M - 11.2M) 5,600,000

16. A
Solution:

Provision for unearned

Gross premiums Premiums Ceded premiums – net

a b c=a–b

November 584,000 476,000 108,000

December 200,000 136,000 64,000

Totals 784,000 612,000 172,000

17. D
Solution:

  Gross premiums Premiums Ceded Net premium

  a b c=a-b

From Nov. and Dec. 20x0 60,000 40,000 20,000

January 240,000 144,000 96,000

February 400,000 328,000 72,000

March 460,000 280,000 180,000

April 432,000 340,000 92,000

May 308,000 216,000 92,000

June 424,000 332,000 92,000

July 280,000 200,000 80,000

August 228,000 132,000 96,000

September 388,000 304,000 84,000

October 380,000 296,000 84,000

Totals 3,600,000 2,612,000 988,000

18. D
Solution:
The totals of non-life insurance policies written, excluding marine cargo are computed as follows:

Motor Total excluding

  Fire Car Bonds Marine Cargo

  a b c d = a+b+c

Gross Premiums (Direct and Assumed)

Jan 1,360,000 480,000 120,000 1,960,000

Feb 1,000,000 240,000 8,000 1,248,000

Mar 1,440,000 288,000 48,000 1,776,000

Apr 2,520,000 300,000 44,000 2,864,000

May 1,120,000 192,000 9,600 1,321,600

Jun 1,520,000 296,000 8,000 1,824,000

Jul 1,600,000 276,000 4,000 1,880,000

Aug 1,440,000 272,000 24,000 1,736,000

Sep 800,000 320,000 28,000 1,148,000

Oct 1,200,000 256,000 16,000 1,472,000

Nov 1,120,000 252,000 24,000 1,396,000

Dec 1,440,000 180,000 16,000 1,636,000

Premium Ceded

Jan 816,000 288,000 72,000 1,176,000

Feb 600,000 144,000 4,800 748,800

Mar 864,000 172,800 28,800 1,065,600

Apr 1,512,000 180,000 26,400 1,718,400

May 672,000 115,200 5,760 792,960

Jun 912,000 177,600 4,800 1,094,400

Jul 960,000 165,600 2,400 1,128,000

Aug 864,000 163,200 14,400 1,041,600

Sep 480,000 192,000 16,800 688,800

Oct 720,000 153,600 9,600 883,200

Nov 672,000 151,200 14,400 837,600

Dec 864,000 108,000 9,600 981,600

Requirement (a): Provision for unearned premiums – Dec. 31, 20x1

 Total
Total
excludin Unearne Marine
  Fraction unearne
g Marine d portion Cargo
Cargo d portion

d=
  e f=dxe g h=f+g
a+b+c

Gross Premiums (Direct and Assumed)

Jan 1,960,000 24-Jan 20,417 - 81,668

Feb 1,248,000 24-Mar 39,000 - 156,000

Mar 1,776,000 24-May 92,500 - 370,000

Apr 2,864,000 24-Jul 208,833 - 835,332

May 1,321,600 24-Sep 123,900 - 495,600

Jun 1,824,000 24-Nov 209,000 - 836,000

Jul 1,880,000 13/24 254,583 - 1,018,332

Aug 1,736,000 15/24 271,250 - 1,085,000

Sep 1,148,000 17/24 203,292 - 813,168

Oct 1,472,000 19/24 291,333 - 1,165,332

Nov 1,396,000 21/24 305,375 560,000 1,781,500

Dec 1,636,000 23/24 391,958 200,000 1,767,832

10,405,76
2,411,442 760,000
8

Premium Ceded

Jan 1,176,000 24-Jan 49,000 - 49,000

Feb 748,800 24-Mar 93,600 - 93,600

Mar 1,065,600 24-May 222,000 - 222,000

Apr 1,718,400 24-Jul 501,200 - 501,200

May 792,960 24-Sep 297,360 - 297,360

Jun 1,094,400 24-Nov 501,600 - 501,600

Jul 1,128,000 13/24 611,000 - 611,000

Aug 1,041,600 15/24 651,000 - 651,000

Sep 688,800 17/24 487,900 - 487,900

Oct 883,200 19/24 699,200 - 699,200

Nov 837,600 21/24 732,900 336,000 1,068,900

Dec 981,600 23/24 940,700 120,000 1,060,700

6,243,46
5,787,460 456,000
0
 Unearned portion - Gross premiums 10,405,768

Less: Unearned portion - Premiums ceded (6,243,460)

Provision for unearned premiums - net 4,162,308

19. C
Solution:

Total
excluding
Marine Earned Marine Total earned
  Cargo Fraction portion Cargo portion

  d = a+b+c e f=dxe g h=f+g

Gross Premiums (Direct and Assumed)

From last
yr. -

Jan 1,960,000 23/24 1,878,332 256,000 2,134,332

Feb 1,248,000 21/24 1,092,000 400,000 1,492,000

Mar 1,776,000 19/24 1,406,000 460,000 1,866,000

Apr 2,864,000 17/24 2,028,668 720,000 2,748,668

May 1,321,600 15/24 826,000 288,000 1,114,000

Jun 1,824,000 13/24 988,000 652,000 1,640,000

Jul 1,880,000 11/24 861,668 280,000 1,141,668

Aug 1,736,000 9/24 651,000 220,000 871,000

Sep 1,148,000 7/24 334,832 392,000 726,832

Oct 1,472,000 5/24 306,668 380,000 686,668

Nov 1,396,000 3/24 174,500 - 174,500

Dec 1,636,000 1/24 68,168 - 68,168

10,615,832 4,048,000 14,663,832

Premium Ceded

From last
yr. -

Jan 1,176,000 23/24 1,127,000 153,600 1,280,600

Feb 748,800 21/24 655,200 240,000 895,200

Mar 1,065,600 19/24 843,600 276,000 1,119,600

Apr 1,718,400 17/24 1,217,200 432,000 1,649,200

May 792,960 15/24 495,600 172,800 668,400

Jun 1,094,400 13/24 592,800 391,200 984,000

 Jul 1,128,000 11/24 517,000 168,000 685,000

Aug 1,041,600 9/24 390,600 132,000 522,600

Sep 688,800 7/24 200,900 235,200 436,100

Oct 883,200 5/24 184,000 228,000 412,000

Nov 837,600 3/24 104,700 - 104,700

Dec 981,600 1/24 40,900 - 40,900

6,369,500 2,428,800 8,798,300

Gross premiums earned 14,663,832

Less: Premiums ceded (8,798,300)

Net premium 5,865,532

20. A
Solution:

Total deferred acquisition costs 48,000

Multiplied by: 19/24

38,00
Expired portion
0

21. B
Solution:

Total deferred acquisition costs 48,000

Multiplied by: 5/24

10,00
Expired portion
0

22. D
Solution:

Dec. 31, Deferred acquisition costs 10,000

20x1
Commission expense 10,000

23. B
Solution:

Dec. 1, 20x1 Gross benefits and claims 400,000

Cash in bank 400,000

24. C
Solution:
 Dec. 1, 20x1 Gross benefits and claims 400,000

Provision for claims 400,000

25. D
Solution:

Sept. 1, 20x1 Gross benefits and claims 400,000

Provision for claims - IBNR 400,000

26. C
Solution:

Insurance contracts liabilities - carrying amount 5,200,000

Deferred acquisition costs (800,000)

Net amount 4,400,000

Insurance contracts liabilities - current estimate 5,000,000

Deficiency in insurance contracts liabilities (600,000)

Dec. 31, Gross benefits and claims 600,000

20x1
Provision for premium

deficiency 600,000

27. D
Solution:

Jan. 1, Cash 4,000

20x1
Gross premiums revenue –

direct 4,000

28. D
Solution:

Feb. 1, Insurance receivables 4,000

20x1
Gross premiums revenue –

direct 4,000

29. A
Solution:

Feb. 7, 20x1 Cash 4,000

Insurance receivables 4,000

30. B
Solution:
 Jan. 1, Gross benefits and claims 4,000,000
20x1
Claims payable 4,000,000

31. A
Solution:

Feb. 8, Claims payable 4,000,000

20x1
Cash in bank 4,000,000

32. D
Solution:

Jan. 1, Gross benefits and claims 800,000

20x1
Cash in bank 800,000