Alex Rodriguez Inc., a publishing company, is preparing its December 31, 2010, financial statements and must determine the proper accounting treatment for the following situations.
On January 2, 2010, Rodriguez discontinued collision, fire, and theft coverage on its delivery vehicles and became self-insured for these risks. Actual losses of $50,000 during 2010 were charged to delivery expense. The 2009 premium for the discontinued coverage amounted to $80,000, and the controller wants to set up a reserve for self-insurance by a debit to delivery expense of $30,000 and a credit to the reserve for self-insurance of $30,000.