FAR- Prepaid Expense/Liability Question from Becker CPA FAR MCQs

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  • #184709 Reply
    MustPass1988
    Member

    I came across this question on the Becker FAR MCQs for FAR2 and I’m a little confused by the explanation. I’m hoping that someone can explain this to me so I can understand it a little more clearly 🙂

    Roro, Inc paid $7200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Yeah 5, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the three months ended March 31, Year 5?

    Answer: Prepaid Insurance- $7000, Insurance Expense- $500

    The prepaid insurance reflected in the unadjusted trial balance would be fully expensed and one month of the renewed policy would be expensed. Insurance Expense equals $500 ($300 plus $7200/36 months). Prepaid insurance equals $7000 (7200X35/36).

     
    “ninja-cpa-review”/
     

    AUD: PASSED [81]; Expired, retaking August 23rd
    BEC: PASSED [83]; Expired, retaking July 11th
    REG: PASSED [83]
    FAR: FAILED [64]; Retaking May 23rd

Viewing 10 replies - 1 through 10 (of 10 total)
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  • #541566 Reply

    MustPass: I hate questions like these. Relying more on experience than books here…I would venture a guess that

    the extra 300 in expense is considered a true up of sorts. Since they were referencing the unadjusted trial balance, there were no other insurance policies, the prior policy had expired with still 300 in prepaid, the assumption would be to true it up and start clean with the new policy. A tricky one no doubt but it's the only solution by default when you think through all of the variables. Still sucks though, these questions are my downfall…

    MBA,CMA,CPA, CFF?, ABV?

    #541598 Reply

    MustPass: I hate questions like these. Relying more on experience than books here…I would venture a guess that

    the extra 300 in expense is considered a true up of sorts. Since they were referencing the unadjusted trial balance, there were no other insurance policies, the prior policy had expired with still 300 in prepaid, the assumption would be to true it up and start clean with the new policy. A tricky one no doubt but it's the only solution by default when you think through all of the variables. Still sucks though, these questions are my downfall…

    MBA,CMA,CPA, CFF?, ABV?

    #541568 Reply
    Gatorbates
    Participant

    – $7,200 amount of new policy. Effective 3-1-x5.

    – 3-31-x5 UNadjusted trial balance = $300 Prepaid, 7,200 Expense.

    – It is the only insurance policy the company has.

    SO ………

    If the new policy is effective 3-1-x5, it replaces the old policy, which has run it's course and expired … therefore, anything in prepaid is due to the old policy and must be expensed to show prepaid at 0. DR Ins Exp 300, CR PP Ins 300.

    AND THEN ……..

    Since the policy was paid on 3-1-x5, and the effective date was the same … the initial entry should be DR PP Ins 7,200, credit cash 7,200.

    At 3-31-x5, one month of this new policy has been “used up” … 7,200 / 36 = $200 per month. So, DR INS Exp $200, CR PP Ins $200.

    So, using a T account, Prepaid initially had $300 … it was expensed, as shown above. Prepaid now zero. Then Prepaid increased 7,200 for the new payment … and then reduced by the $200 for the month of March 20×5. So, Prepaid = 7,000.

    As far as expense goes, the the initial policy that expired had $300 expensed … and the $200 for March of the new policy (just mentioned above). Total = $500 Ins expense.

    Hope that helps.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #541600 Reply
    Gatorbates
    Participant

    – $7,200 amount of new policy. Effective 3-1-x5.

    – 3-31-x5 UNadjusted trial balance = $300 Prepaid, 7,200 Expense.

    – It is the only insurance policy the company has.

    SO ………

    If the new policy is effective 3-1-x5, it replaces the old policy, which has run it's course and expired … therefore, anything in prepaid is due to the old policy and must be expensed to show prepaid at 0. DR Ins Exp 300, CR PP Ins 300.

    AND THEN ……..

    Since the policy was paid on 3-1-x5, and the effective date was the same … the initial entry should be DR PP Ins 7,200, credit cash 7,200.

    At 3-31-x5, one month of this new policy has been “used up” … 7,200 / 36 = $200 per month. So, DR INS Exp $200, CR PP Ins $200.

    So, using a T account, Prepaid initially had $300 … it was expensed, as shown above. Prepaid now zero. Then Prepaid increased 7,200 for the new payment … and then reduced by the $200 for the month of March 20×5. So, Prepaid = 7,000.

    As far as expense goes, the the initial policy that expired had $300 expensed … and the $200 for March of the new policy (just mentioned above). Total = $500 Ins expense.

    Hope that helps.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #541570 Reply
    MustPass1988
    Member

    Thanks everyone! That helped a lot. The MCQs in FAR2 (Becker) are killer because there's such a wide variety of material. My brain kind of shut down on that one 🙂

    AUD: PASSED [81]; Expired, retaking August 23rd
    BEC: PASSED [83]; Expired, retaking July 11th
    REG: PASSED [83]
    FAR: FAILED [64]; Retaking May 23rd

    #541602 Reply
    MustPass1988
    Member

    Thanks everyone! That helped a lot. The MCQs in FAR2 (Becker) are killer because there's such a wide variety of material. My brain kind of shut down on that one 🙂

    AUD: PASSED [81]; Expired, retaking August 23rd
    BEC: PASSED [83]; Expired, retaking July 11th
    REG: PASSED [83]
    FAR: FAILED [64]; Retaking May 23rd

    #541573 Reply
    Gatorbates
    Participant

    I know what you mean. F2 was the most annoying for me to study.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #541604 Reply
    Gatorbates
    Participant

    I know what you mean. F2 was the most annoying for me to study.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #3315850 Reply
    Anonymous
    Guest

    Could someone explain why the insurance expense @ 3/31/year5 is $200 @ 3/31/year5 rather than $7,700? I got $7,700 from doing this:

    $7,200 (from unadjusted TB @ 3/31/yr5) + $300 (from expensing the expired old policy's $300 Prepaid Insurance that's in the unadjusted TB) + $200 (Insurance Expense we recognize after 1 month of the NEW policy)

    Why do we just ignore the unadjusted trial balance of $7200 Insurance Expense?

    #3315853 Reply
    Anonymous
    Guest

    Sorry I made a typo in my reply. I meant to ask why the insurance expense @ 3/31/year 5 is $500 @ 3/31/year5 rather than $7,700.

Viewing 10 replies - 1 through 10 (of 10 total)
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