Edible Chemicals Corporation owns a $4 million whole life insurance policy on the life of its CEO, naming Edible Chemicals as beneficiary. The annual premiums are $70,000 and are payable at the beginning of each year. The cash surrender value of the policy was $21,000 at the beginning of 2018.

Required:
1. Prepare the appropriate 2018 journal entry to record insurance expense and the increase in the investment assuming the cash surrender value of the policy increased according to the contract to $27,000.
2. The CEO died at the end of 2016. Prepare the appropriate journal entry.

Solution:

Cash surrender value to be recorded:

Cash surrender value = New cash surrender value - Previous cash surrender value

                                   = $27,000 - $21,000 = $6,000

Insurance expense to be recorded:

Insurance expense = Premium amount - Cash surrender value

                                = $70, 000 - $6,000 = $64, 000  

The journal entry to record the insurance expense and increased investment :

Date           Account Titles and Explanation      Debit (S)     Credit (S)

2018                 Insurance expense                         64,000

             Cash surrender value of life insurance     6,000

                                    Cash                                                          70,000

(To record the annual expenses and increased in investment related to insurance)  

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