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April 2002 - # 14 - also exam ques for end of chapt 11

M

MindFull

Ton up Member
Hi, guys, a little issue here with the cost of increasing reserves for this question. How come all the "cost of increasing reserve" values aren't negative, just the first one is. I thought generally since reserves are something the company has to pay for, then the cost of increasing it is always negative.



Thanks.
 
Does the answer to the thread below help?

http://www.acted.co.uk/forums/showthread.php?t=1724

The difference between this question and others you may have seen is that here the reserve required is constant (at one year's office premium), rather than increasing over time.

Since the reserve set up earns interest over the year, we have more than we need in our reserves at the end of the year, so can take some out. This is called a release of reserves (we take away from them rather than adding to them) giving the opposite sign.

Mark.
 
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