When an agent and an applicant for a life insurance policy fill out and sign the application, which journal entry should the insurance company record upon receiving the initial premium payment?

• A. Debit Accounts Receivable; Credit Premium Revenue
• B. Debit Unearned Premium Revenue; Credit Cash
• C. Debit Premium Revenue; Credit Cash
• D. Debit Cash; Credit Unearned Premium Revenue

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. When the insurance company receives the initial premium payment, it is receiving cash upfront for a service (insurance coverage) that will be provided in the future. This creates a liability for the company, as it owes the coverage to the policyholder.
2. Step 2: Identify the accounts involved. The two accounts affected are 'Cash' (an asset account) and 'Unearned Premium Revenue' (a liability account). Cash increases because the company receives payment, and Unearned Premium Revenue increases because the company has an obligation to provide coverage.
3. Step 3: Determine the type of journal entry. Since Cash is an asset account, receiving cash means it should be debited (increased). Unearned Premium Revenue is a liability account, and recording the obligation means it should be credited (increased).
4. Step 4: Write the journal entry. The journal entry will be: Debit Cash (to record the increase in cash) and Credit Unearned Premium Revenue (to record the liability for future coverage).
5. Step 5: Understand the accounting principle. This entry follows the accrual accounting principle, which requires revenue to be recognized only when earned. Since the insurance coverage has not yet been provided, the premium payment is recorded as unearned revenue rather than premium revenue.