Felipe Estrella, 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 (Ex- hibit 2), which showed claims expenses. For some reason, the claims expenses shown on the income statement were much greater than total claims paid on the Claims Paid Report. As far as Mr. Estrella 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. He was certain he would be asked about the difference at the monthly meeting of division managers, and resolved to figure it out as best he could before the meeting. As part of his analysis, Mr. Estrella had his secretary bring him a detailed listing of claims. This in- formation is shown in Exhibit 3. Assignment 1. 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. 2. What should Mr. Estrella 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. Claim # 930250 930253 930254 930255 930256 930257 930258 930259 930301 930302 930303 930304 930305 930306 930307 930308 Date Received February 16 February 17 JUPITER INSURANCE COMPANY Exhibit 1. Claims Paid Report for the Automobile Division For the Month of March February 18 February 19 February 19 February 20 February 24 February 27 March 3 Notes: 1. March 5 March 8 March 8 930309 930310 Total claims paid 2. March 9 March 11 March 14 March 15 March 15 March 17 Premium revenue (1) Less: Claims expenses (2) Gross margin Less operating expenses: Salaries and wages Depreciation Rent and utilities Total operating expenses Operating income Less: interest expense Income before taxes Less: provision for income taxes Net income Date Paid March 1 March 3 March 4 March 5 March 6 March 7 March 10 March 13 March 17 March 19 March 22 March 23 March 22 March 23 March 28 March 29 March 30 March 30 Exhibit 2. Income Statement for March for the Automobile Division 30,000 1,000 7,000 Amount $3,000 800 1,900 1,800 300 1,500 1,400 1,350 3,000 6,500 1,200 500 700 5,600 400 800 2,300 300 $33,350 $195,000 72,000 $123,000 38,000 $85,000 5,000 $80,000 32,000 $48,000 Most clients pay their automobile insurance in January for the entire year. Some clients pay in three installments. Oth- ers pay on a monthly basis. The amount of premium revenue shown on this line represents the revenue earned for the month of March. Ordinarily, the premium revenue earned is 1/12 of the annual premium, regardless of the timing of the payments. Includes $21,300 of claims received and paid, $34,700 of claims received but not paid, and $16,000 of claims that the actuarial department estimated were incurred during March, but that Jupiter had not received because they had not yet been reported to the company by its beneficiaries. Claim # 930250 930253 930254 930255 930256 930301 930302 930303 930304 930305 930257 930258 930259 February Subtotal 930306 930307 930308 930309 930311 930312 930313 930314 JUPITER INSURANCE COMPANY Exhibit 3. Claim Details for the Automobile Division for March Subtotal Date Received February 16 February 17 930315 930316 930317 930318 930319 930320 February 18 February 19 February 19 February 20 February 24 February 27 March 3 March 5 March 8 March 8 March 9 930310 March subtotal-paid March 11 March 14 March 15 March 15 March 17 March 18 March 20 March 22 March 22 March 23 March 24 March 25 March 27 March 28 March 29 930321 930322 March subtotal-unpaid March 30 March 31 Date Paid March 1 March 3 March 4 March 5 March 6 March 7 March 10 March 13 March 17 March 19 March 22 March 23 March 22 March 23 March 28 March 29 March 30 March 30 Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Unpaid Amount $ 3,000 800 1,900 1,800 300 1,500 1,400 1,350 $ 3,000 6,500 1,200 500 700 5,600 400 800 2,300 300 $ 4,000 6,500 3,300 2,000 700 1,100 500 4,100 2,200 3,700 900 5.700 $12,050 21,300 34,700