Accounting treatment of premium deficiency reserve results in which effect?

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Multiple Choice

Accounting treatment of premium deficiency reserve results in which effect?

The key idea is that a premium deficiency reserve is a liability set up when expected future premiums are not enough to cover expected future costs. When this deficiency is recognized, it is recorded as a liability and the amount is charged against earnings, reducing income for the period. This is why the correct effect is to write in liability and reduce income. It does not increase assets, it does not provide an equity infusion, and it does not create a deferred tax liability.

The key idea is that a premium deficiency reserve is a liability set up when expected future premiums are not enough to cover expected future costs. When this deficiency is recognized, it is recorded as a liability and the amount is charged against earnings, reducing income for the period. This is why the correct effect is to write in liability and reduce income. It does not increase assets, it does not provide an equity infusion, and it does not create a deferred tax liability.

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