2012.Fall

The solution to this problem requires a formula for pre-paid expenses as the sum of the following quantities:

• commissions and brokerage expenses incurred (column 23)
• taxes,licenses and fees incurred (column 25)
• other acquisition, field supervisions and collection expenses incurred (column 27)
• and half of the general expenses incurred (50% of column 29)

But this formula is not actually provided in the source text. Pre-paid expenses for a particular line of business (versus for all lines of business combined) is an allocation calculated with this formula: (see also here)

Formula 2a:    (PPE for UEP)A    =    PPERA    x    m(UEPA)

Now, the text does give a formula for net acquisition expense at the bottom of page 221 as the sum of:

• commissions and brokerage expenses incurred (column 23)
• taxes,licenses and fees incurred (column 25)
• other acquisition, field supervisions and collection expenses incurred (column 27)
• and half of the general expenses incurred (50% of column 29)

This is the same formula as above but applied to all lines of business combined instead of just a particular line. To apply the formula to a particular line, you have to make the assumption that the pre-paid expense can be calculated as a sum in the same way as net acquisition expense. But I'm not sure you would ever do it that way because pre-paid expenses are supposed to be calculated as an allocation.

So all in all, I think it was a bit of a contrived problem. (shout-out to SK!)