9.11 Similarities: The accountant makes estimates of future events in both
cases. The accountant charges the cost of estimated uncollectibles or warranties to income in the period of sale, not in the later period when specific items become uncollectible or break down. The income statement reports the charge against income as an expense in both cases, although some accountants report the charge for estimated uncollectibles as a revenue contra.
Differences: The balance sheet account showing the expected costs of future uncollectibles reduces an asset account, whereas that for estimated warranties appears as a liability.
A reversal implies that the previously accrued charge turned out to be too high, in light of the new information (including realized expenditures). Because the reversal lowers the amount of expense reported in the current period, it increases income.
(Accounting for prepayments.) (amounts in millions of euros)
a. Journal entry to record insurance premium payments in 2012, 2011, and
2010:
Prepayments............................................................ 50.0
Cash..................................................................... 50.0
b. Adjusting journal entries required each year.
2011:
Insurance Expense................................................... 66.3
Prepayments........................................................ 66.3 To adjust Prepayments for the amount consumed
during 2011, of