MODULE 2- LOMA 361 EXAM
QUESTIONS WITH 100% CORRECT
ANSWERS
A typical accounting entry to record the issue and sale of an insurer's common stock at
par value is a debit to Cash and a credit to Common Stock. Recall that the par value of
a stock is the designated legal value assigned to each outstanding share of stock.
"Proceeds from the sale of an insurer's common stock increase its cash and its owners'
equity. However, issuing (selling) common stock requires a stock insurer to pay
transaction costs that reduce its net proceeds from the sale of the stock. In addition,
some issuers of common stock pay regular cash dividends to owners of their stock.
These companies must plan ahead to have funds available to make these dividend
payments."
the most basic form of ownership, including voting rights on major issues, in a company
a type of stock that usually entitles the owner to (1) vote on the selection of directors
and on other important company matters and (2) receive dividends on the stock, if they
are declared.
life insurers typically invest more heavily in this stock.
Under U.S. statutory accounting, most of this type 0f stock is reported at fair value as of
the financial reporting date and they report most preferred stock in a manner similar to
bonds
under US GAAP, insurers report the fair value per share of each stock they own
preferred stock - Answer-the owners' equity account to which an insurer records the
sales and repurchases of its own preferred stock. A typical accounting entry to record
the issue and sale of the insurer's preferred stock at par value is a debit to Cash and a
credit to Preferred Stock.
The general characteristics as a source of financing are the same for stock insurance
companies as they are for any other stock company and, in many ways, the same as
the characteristics of common stock.
Proceeds from the sale of an insurer's preferred stock increase its owners' equity just as
do proceeds from the sale of common stock.
In addition, a stock insurer that issues (sells) preferred stock must pay transaction
costs that reduce its net proceeds from the sale of the stock.
,In contrast to common stock dividends, preferred stock dividends are payable according
to a schedule. The insurer's board of directors may choose not to declare the payment
of a scheduled dividend on preferred stock if the insurer's circumstances—such as
extreme financial distress—warrant such a choice."
Gross Paid in and Contributed Surplus - Answer-"the aggregate amount paid above the
par value for shares of an insurer's own stock under U.S. statutory accounting."
retained earnings - Answer-the amount of net income retained in the corporation.
note - unassigned surplus and gaap
only certain transactions can directly impact this.
examples are : amount of gains or losses from the company's operations, dividends
paid to stockholders, extraordinary items, and monetary adjustments that result from
changes in accounting procedures
Treasury Stock - Answer-A corporation's own stock that it has issued and later
reacquired.
it is a contra Equity account.
It's companion account is a common stock and an increase in a treasury stock
decreases the insurers capital
under GAAP , the BAC is A debit to the treasury stock and a credit to the cash
par value is not a factor in the purchase transaction but it will be a factor if the insurer
resells at a later date
Gains from the sale of this type of stock are reported on the statement of owners equity
increases in this type of stock decrease the amount in common stock
Under statutory accounting, the purchase of treasury stock reduces an insurer's total
surplus. For this reason, an insurer typically must obtain regulatory approval to
purchase treasury stock. On the Annual Statement, an insurer reports treasury stock at
the bottom of the Liabilities, Surplus and Other Funds page, in the special section on
capital and surplus.
retired stock - Answer-When treasury stock is acquired with purpose of retiring them
and price paid is in excess of the par or stated value, excess may be charged against
either all paid in cap or RE - cost method
Under GAAP, this is a debit to treasury stock a debit to additional paid in capital
treasury stock and a credit to cash
,The insurer deduct the number of shares and their monetary value from the capital
account
Special surplus - Answer-Also known as assigned surplus, appropriated surplus,
earmarked surplus or contingency reserves consist of the part of the insurers surplus
that the insurers Board of Directors has set aside to:
1. meet Unforeseen contingencies Or
2. Pay for certain Extraordinary expenses
amounts in this account are not available for distribution to stock owners or policy
owners, nor do they replace and insurers obligation to establish liabilities for expected
occurrences
The amount can be voluntary or involuntary, depending on statutory requirements.
Unassigned surplus - Answer-Represents the accumulation of income not paid out in
dividends.
**similar to retained earnings
also called divisible surplus or free surplus and is the total amount of undistributed and
unapportiined surplus remaining in the insurance company since the company began
operations.
This is available to me any contingency that arises, including new business, outstanding
debt, or the purchase of treasury or retired stock
two primary factors in determining the amount of this kind of surplus available for
distribution to an insurer's owners are . the amount of business that the insurer rights
and 2. the contractual agreements that the insurer has, such as loan agreements that
might affect its future financial situation
Surplus note - Answer-A type of unsecured debt instrument, issued only by insurers,
that has characteristics of both conventional equity and debt securities and is classified
as policyholders' surplus rather than as a liability on the insurer's statutory balance
sheet.
under SAP , these increase and insurers surplus, not its liabilities and this is a key
advantage
must contain a provision stating that interest payments and principal repayment require
prior approval of the commissioner of the state of domicile
Revenue account - Answer-also called income accounts, are the accounts used to
record and report a company's revenues.
, An insurance company complies with accounting and financial reporting requirements
by classifying its premium income, investment income, and fee income by individual or
group product line and by product type: life, accident and health, credit life, and
annuities.
Thus, insurers typically credit one of several accounts according to the revenue source,
product line, and product type.
Premium accounting - Answer-the maintenance of detailed accounting records and
reports of insurance premium transactions, such as premium billing and collections.
Premium income includes premiums that an insurer receives from the various product
lines that it sells as well as any reinsurance premiums that the insurer receives from
providing reinsurance coverage.
*****calculate premium income on an accrual basis
*** The receipt of policy premiums increases both and insurers revenues and its assets
The most important objectives are to:
-Bill for premiums before their due date, with sufficient lead time between the billing and
due dates
-Record the receipt of premiums in the premium accounting system
-Classify premium income by product type, jurisdiction, and other specified categories
so that the insurer can use the data to calculate taxable income and prepare financial
statements by line of business
-Accept premium payments after the expiration of the grace period under circumstances
acceptable to the insurer
-Terminate a policy or change the policy from a premium-paying status to a specified
nonforfeiture option, if the policyowner has not paid the premium
Typical sources of investment income are .. - Answer-- Interest income on policy loans,
bonds, and mortgages
- Rental income on real estate
- Cash dividends on stock owned by the insurer"
Collected income - Answer-Amount of income received In cash during an accounting
period.
can have both earned and unearned portions
Unearned Income - Answer-Income received from sources other than employment.
reported as a liability
Uncollected income - Answer-Income due before the Financial reporting date , But
which the insurer has not received as to the reporting date.
*this is reported as an asset
QUESTIONS WITH 100% CORRECT
ANSWERS
A typical accounting entry to record the issue and sale of an insurer's common stock at
par value is a debit to Cash and a credit to Common Stock. Recall that the par value of
a stock is the designated legal value assigned to each outstanding share of stock.
"Proceeds from the sale of an insurer's common stock increase its cash and its owners'
equity. However, issuing (selling) common stock requires a stock insurer to pay
transaction costs that reduce its net proceeds from the sale of the stock. In addition,
some issuers of common stock pay regular cash dividends to owners of their stock.
These companies must plan ahead to have funds available to make these dividend
payments."
the most basic form of ownership, including voting rights on major issues, in a company
a type of stock that usually entitles the owner to (1) vote on the selection of directors
and on other important company matters and (2) receive dividends on the stock, if they
are declared.
life insurers typically invest more heavily in this stock.
Under U.S. statutory accounting, most of this type 0f stock is reported at fair value as of
the financial reporting date and they report most preferred stock in a manner similar to
bonds
under US GAAP, insurers report the fair value per share of each stock they own
preferred stock - Answer-the owners' equity account to which an insurer records the
sales and repurchases of its own preferred stock. A typical accounting entry to record
the issue and sale of the insurer's preferred stock at par value is a debit to Cash and a
credit to Preferred Stock.
The general characteristics as a source of financing are the same for stock insurance
companies as they are for any other stock company and, in many ways, the same as
the characteristics of common stock.
Proceeds from the sale of an insurer's preferred stock increase its owners' equity just as
do proceeds from the sale of common stock.
In addition, a stock insurer that issues (sells) preferred stock must pay transaction
costs that reduce its net proceeds from the sale of the stock.
,In contrast to common stock dividends, preferred stock dividends are payable according
to a schedule. The insurer's board of directors may choose not to declare the payment
of a scheduled dividend on preferred stock if the insurer's circumstances—such as
extreme financial distress—warrant such a choice."
Gross Paid in and Contributed Surplus - Answer-"the aggregate amount paid above the
par value for shares of an insurer's own stock under U.S. statutory accounting."
retained earnings - Answer-the amount of net income retained in the corporation.
note - unassigned surplus and gaap
only certain transactions can directly impact this.
examples are : amount of gains or losses from the company's operations, dividends
paid to stockholders, extraordinary items, and monetary adjustments that result from
changes in accounting procedures
Treasury Stock - Answer-A corporation's own stock that it has issued and later
reacquired.
it is a contra Equity account.
It's companion account is a common stock and an increase in a treasury stock
decreases the insurers capital
under GAAP , the BAC is A debit to the treasury stock and a credit to the cash
par value is not a factor in the purchase transaction but it will be a factor if the insurer
resells at a later date
Gains from the sale of this type of stock are reported on the statement of owners equity
increases in this type of stock decrease the amount in common stock
Under statutory accounting, the purchase of treasury stock reduces an insurer's total
surplus. For this reason, an insurer typically must obtain regulatory approval to
purchase treasury stock. On the Annual Statement, an insurer reports treasury stock at
the bottom of the Liabilities, Surplus and Other Funds page, in the special section on
capital and surplus.
retired stock - Answer-When treasury stock is acquired with purpose of retiring them
and price paid is in excess of the par or stated value, excess may be charged against
either all paid in cap or RE - cost method
Under GAAP, this is a debit to treasury stock a debit to additional paid in capital
treasury stock and a credit to cash
,The insurer deduct the number of shares and their monetary value from the capital
account
Special surplus - Answer-Also known as assigned surplus, appropriated surplus,
earmarked surplus or contingency reserves consist of the part of the insurers surplus
that the insurers Board of Directors has set aside to:
1. meet Unforeseen contingencies Or
2. Pay for certain Extraordinary expenses
amounts in this account are not available for distribution to stock owners or policy
owners, nor do they replace and insurers obligation to establish liabilities for expected
occurrences
The amount can be voluntary or involuntary, depending on statutory requirements.
Unassigned surplus - Answer-Represents the accumulation of income not paid out in
dividends.
**similar to retained earnings
also called divisible surplus or free surplus and is the total amount of undistributed and
unapportiined surplus remaining in the insurance company since the company began
operations.
This is available to me any contingency that arises, including new business, outstanding
debt, or the purchase of treasury or retired stock
two primary factors in determining the amount of this kind of surplus available for
distribution to an insurer's owners are . the amount of business that the insurer rights
and 2. the contractual agreements that the insurer has, such as loan agreements that
might affect its future financial situation
Surplus note - Answer-A type of unsecured debt instrument, issued only by insurers,
that has characteristics of both conventional equity and debt securities and is classified
as policyholders' surplus rather than as a liability on the insurer's statutory balance
sheet.
under SAP , these increase and insurers surplus, not its liabilities and this is a key
advantage
must contain a provision stating that interest payments and principal repayment require
prior approval of the commissioner of the state of domicile
Revenue account - Answer-also called income accounts, are the accounts used to
record and report a company's revenues.
, An insurance company complies with accounting and financial reporting requirements
by classifying its premium income, investment income, and fee income by individual or
group product line and by product type: life, accident and health, credit life, and
annuities.
Thus, insurers typically credit one of several accounts according to the revenue source,
product line, and product type.
Premium accounting - Answer-the maintenance of detailed accounting records and
reports of insurance premium transactions, such as premium billing and collections.
Premium income includes premiums that an insurer receives from the various product
lines that it sells as well as any reinsurance premiums that the insurer receives from
providing reinsurance coverage.
*****calculate premium income on an accrual basis
*** The receipt of policy premiums increases both and insurers revenues and its assets
The most important objectives are to:
-Bill for premiums before their due date, with sufficient lead time between the billing and
due dates
-Record the receipt of premiums in the premium accounting system
-Classify premium income by product type, jurisdiction, and other specified categories
so that the insurer can use the data to calculate taxable income and prepare financial
statements by line of business
-Accept premium payments after the expiration of the grace period under circumstances
acceptable to the insurer
-Terminate a policy or change the policy from a premium-paying status to a specified
nonforfeiture option, if the policyowner has not paid the premium
Typical sources of investment income are .. - Answer-- Interest income on policy loans,
bonds, and mortgages
- Rental income on real estate
- Cash dividends on stock owned by the insurer"
Collected income - Answer-Amount of income received In cash during an accounting
period.
can have both earned and unearned portions
Unearned Income - Answer-Income received from sources other than employment.
reported as a liability
Uncollected income - Answer-Income due before the Financial reporting date , But
which the insurer has not received as to the reporting date.
*this is reported as an asset
