[CPATooleTime]

NINJA Question –

Can someone tell me if I am reading this question wrong? To me it looks like the $17,500 adjustment is already included in Insurance Premiums Paid because it says it is including the adjustment. But I got it wrong because I did not add the adjustment again to get the correct answer.

I am so confused. Am I looking at it wrong?

Thanks in advance!

“CPA 2016.0 – FAR
Costs and Expenses, Question # 1375
Under East Co.’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim
financial reports, East makes monthly estimated charges to insurance expense with credits to pre paid insurance.
Additional information for the year ended December 31, Year 2, is as follows:
Prepaid insurance at December 31, Year 1 $105,000
Charges to insurance expense during Year 2
(including a year-end adjustment of $17,500) 437,500
Prepaid insurance at December 31, Year 2 122,500
What was the total amount of insurance premiums paid by East during Year 2?
A. $332,500
B. $420,000
Incorrect C. $437,500
D. $455,000
You answered C. The correct answer is D.
To answer this question, one needs to convert from the accrual insurance expense to cash paid for insurance.
Basically, add the insurance expense for the year ($437,500) to the increase in prepaid insurance during the year
(from $105,000 to $122,500, a $17,500 increase):
$437,500 + $17,500 = $455,000″

[Anonymous]

It's not included in premiums paid. They are asking you to compute the cash expended from the accrual data it gives you. The Increase in Prepaid expense is cash outflow so you have the 17.5k. Additionally, they debited the expense for 437.5k. So total cash outflow for Insurance during the year must have been 17.5k Net Prepayment + 437.5k Expense = 455k. Does that make sense?

[CPATooleTime]

Thanks for your insight @AF. I will try to wrap my mind around it. Much appreciated!!

[Author]

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