Felipe Estrela, the newly-hired Claims Manager of the Automobile Division of Jupiter Insurance Company, was puzzled. On his desk lay two documents. One was the monthly Claims Paid Report for March (Exhibit 1), which showed the total claims paid to beneficiaries for the month by Jupiter’s recently-established Automobile Division. The other was the division’s March income statement (Exhibit 2), which showed claims expenses.
For some reason, the claims expenses on the income statement were much greater than total claims paid on the Claims Paid Report. As far as Mr. Estrela was concerned, however, the payment of a claim was an expense, so there should be no difference between the two numbers. Yet there it was, with only two hours remaining before the monthly meeting of division managers. He was certain he would be asked about the difference, and resolved to figure it out as best he could before the meeting began.
As part of his analysis, Mr. Estrela had his secretary bring him a detailed listing of claims. This information is shown in Exhibit 3. . . .
- Reconcile the differences between the Claims Paid Report and the income statement. Try to do so using T accounts to record the various items in summary form. Some of these T accounts will be income statement accounts and some will be balance sheet accounts. (Hint: one of the balance sheet accounts will be a liability called “Claims Incurred but not Received.”)
- What should Mr. Estrela say at the meeting if he is asked about the difference between the two amounts? As part of your analysis, be sure to comment on the two notes at the bottom of Exhibit 2, as well as the accounting principles that are at work at Jupiter.