How should the receipt of premiums be treated in an internal service fund when probable measurable losses are determined?

In the context of internal service funds, the treatment of premium receipts alongside probable measurable losses is crucial for ensuring accurate financial reporting. When the internal service fund receives premiums, it recognizes revenue based on the expected amount that reflects the services provided. In this case, if the fund anticipates that there will be measurable losses, it is necessary to account for both the revenue from premiums and the anticipated losses.

The correct accounting treatment includes recognizing the total revenue derived from the premiums while also accounting for the losses. By recognizing $40,000 as revenue, the fund acknowledges the income from premiums. The additional amount of $2,000 can be considered an interfund transfer, which represents funds needed to cover the anticipated losses. This method effectively separates the operational revenue from the financial maneuvering necessary to maintain fiscal stability within the fund.

This approach aligns with the principles of transparency and accountability in government accounting, where it is important to reflect both the sources of revenue and the obligations to cover potential losses in the financial statements. Therefore, the combined recognition of both revenue and interfund transfer accurately captures the overall financial position of the internal service fund when considering probable measurable losses.