AICPA Exam CPA-Financial Topic 3 Question 84 Discussion

Actual exam question for AICPA's CPA Financial Accounting and Reporting exam

Question #: 84
Topic #: 3

[All CPA Financial Accounting and Reporting Questions]

On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before, and instituted new accounting policies.

Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial statements, or neither an accounting change nor an accounting error.

Item to Be Answered

During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the period January 1, 1992, through January 1, 1994.

List A (Select one)

AChange in accounting principal.

BChange in accounting estimate.

CCorrection of an error in previously presented financial statements.

DNeither an accounting change nor an accounting error.

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. Expensing insurance premiums when paid (rather than allocating them to the periods benefited) is a correction of an error in previously presented financial statements.

by Roxane at Apr 10, 2024, 01:56 PM

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Lynda

12 days ago

Ah, I see where you're coming from. But I think the fact that they're presenting the 1993 financials in comparative form with 1992 suggests they're trying to correct the error, not just change the estimate. So, I'm sticking with option C.

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Vicki

14 days ago

I don't know, I'm still a bit confused. What if they had intentionally expensed the whole thing in 1992, even though they knew it covered a longer period? Then wouldn't it be a change in estimate, since they're now allocating it correctly?

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Bettina

15 days ago

Haha, you guys are really overthinking this. It's clearly just a correction of an error, as the premium was wrongly expensed all in 1992. Simple as that, option C is the way to go.

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Veronica

16 days ago

Hmm, I see both of your points, but I'm leaning more towards a change in accounting principle, option A. The fact that they're presenting the 1993 financials in comparative form with 1992 makes me think they're trying to make the financial statements more comparable, which suggests a change in principle.

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Rana

18 days ago

I'm not so sure about that. If the company had consistently expensed the insurance premium in the year it was paid, then the change to allocating it over the coverage period would be a change in accounting estimate, option B.

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Felicidad

20 days ago

This is a tricky one. The fact that the insurance premium was paid and entirely expensed in 1992, but was actually for the period until January 1, 1994, suggests an error in the previous year's financial statements. So, I'd say this is a correction of an error, option C.

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