[Mike27]

Hi Everyone,

This is my first post. I just encountered a question on the optional review of the financial section of the Becker CPA review software.

Year 1 entity expensed $60k insurance policy. 30% tax. What should be the year 2 adjustment to beginning retained earnings.

Correct answer: 40k * .7 = 28 increase

I answered 40k. My reasoning: Multiplying the value of the remaining insurance policy by 1 – tax rate understates the beginning balance of year 2. If the company hadn’t expensed the entire policy during year 1, then the net assets of year 2 would reflect the entire 40k remainder of the insurance policy.

Would love some enlightenment. Thanks everyone!

On a side note – My job provided the software, and rushing at work I accidentally elected 2012 FAR self study. The FAR classes in my area basically are over. Would you recommend a study strategy, or really anything I can do to improve that chance I’ll pass on my first attempt the FAR section of the exam? I’m not too far in, and I score close to 70 on the somewhat comprehensive optional end of section reviews.

I appreciate it.

Mike

[rsoxtim]

Since they should have expensed $20K of it and recorded the remaining $40K as a prepaid expense, the difference between expense booked ($60K) and what should have been booked ($20K) is $40K, which is booked as the adjustment to the beginning RE balance, net of taxes. Since there's no comparative FS issued (or any mention there is), the adjustment is booked to the opening balance of Year 2's RE.

Think about it this way, assuming 0% taxes to make it easy, and no other expenses.

Year 1: Revenues 100K – insurance expense 60K = NI 40K

Year 1 (what it should have been): Revenues 100K – insurance expense 20K = NI 80K

Because RE is understated by 40K, the adjustment is made at the beginning of year 2 to adjust it.

Virginia

F - Passed
R - 1/19/2013
B - February 2013
A - April 2013

[Author]

Replies