A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $150,000 for the 2-year policy payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $80,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $100,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be:

The answer is $155,000

Explanation:

Solution

Given that:

The Malpractice claims should accumulate an estimated loss by a charge to operations as soon as both the following conditions are :

1. There is a possibility that an asset has been weakened or a liability has been incurred.

2. The loss can be reasonably estimated

Thus

The Basic premium is = $150,000

The Additional premium is = $80,000 for first year as result of claims

So,

The  insurance expense in first year is  given as follows:

150,000/2 + 80,000

= 75,000+80,000

= $155,000

Therefore the amount of insurance expense that should appear on the financial statements at the end of the first year is $155,000

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