Exam 6: IASA Accounting Text, #47 in 1997Exam(Pg 38,All10V2

[baboyounglee]

Can you help on this problem? The answer in the All10 is very confusing...

#47 (1997 Exam): According to the IASA accounting text, there are basically two methods of configuring premium data to calculate the unearned premium reserves. You are given the following data:
Policy Term: Semi-annual
Initial Premium: $120
Financial Statement Data: Dec. 31, 1997
Effective Date of the Policy: August 1, 1997

Additional Prem. arising from an endorsement:
Amount Collected: $30
Effective Date: Nov., 1, 1997

Using the semi-annual pro rata computation method, identify the two configuration methods and show how you would calculate the unearned premium reserves as of Dec., 31, 1997 for each of the methods.

Thank you in advance!!![/b]

[J.T.]

In force Method:

You have 120 of premium in effect at 12/31.
You also have an endorsement that went into effect on 11/1.
Compute the full 6 month cost of the endorsement (as if it was part of the policy on 8/1. So that is 6/3*$30 = $60.
So the Premium in effect as of 12/31 is $120+60 = $180.
Since the problem specified that it is a semi-annual pro-rata method, 50% of the premium is earned in 97 and 50% earned in 98, so $90 is UEPR.

Direct method:
We have $120 + $30 = $150 of premium.
Semi-annual pro rata: 50% * $150 = $75.

I just looked at the All10 answer, and see that I did it almost the same way, but maybe if you tell me what you're having problems with, I can help you with it.

The one thing that orginally tripped me up with this problem was that I didn't use the semi-annual pro rata method. I originally used the semi-monthly. That's probably your problem, but I am a horrible guesser usually, so I will wait and see if you respond.

Good luck to you! :wink:

[baboyounglee]

That's right! I didn't use the semi-annual pro rata method.
Thank you very much! J.P.!
:P