CASH SURRENDER VALUE

Background
1. A business insures the life of its officers. 2. The beneficiary is the business.

Reason
1. To compensate the business for the loss of services arising from the untimely death of important members of management.

Insurance policy will have

1. Cash surrender value (CSV) - the amount which the insurance firm will pay upon the surrender and cancellation of the life insurance policy. 2. Loan value the amount which the insured can borrow from the insurance firm with the cash surrender value as collateral security

Requisites of cash surrender value

1. The policy is a life policy. 2. Premiums for three full years have been paid. 3. The policy is surrendered at the end of the third year or anytime thereafter.

Policy year may

1. coincide with accounting period 2. not coincide with accounting period

Special Note
1. If the beneficiary of the life policy is other than the company a. no complicated accounting procedures b. payment of premium is charged to insurance expense.

Pro-forma Entries: Policy Year same as Accounting Period

Payment of insurance Life insurance expense Premium Cash Initial recognition Of CSV Subsequent recognition of CSV Receipt of dividends Cash surrender value Life insurance expense Accumulated profits Cash surrender value Life insurance expense Cash Life insurance expense xxx xxx xxx xxx xxx xxx xxx xxx

Receipt of proceeds Of life policy

Cash Cash surrender value Life insurance expense Gain on life insurance settlement

xxx xxx xxx xxx

Pro-forma Entries: Policy Year not the same as Accounting Period

Payment of insurance Life insurance expense premium Cash Adjusting entry Reversing entry Initial recognition of CSV Subsequent recognition of CSV Receipt of dividends Receipt of proceeds of life policy Prepaid life insurance Life insurance expense Life insurance expense Prepaid life insurance Cash surrender value Life insurance expense Accumulated profits Cash surrender value Life insurance expense Cash Life insurance expense Cash Cash surrender value Life insurance expense Gain on life insurance settlement xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

May 2009