AICPA Exam CPA-Financial Topic 3 Question 84 Discussion

Actual exam question for AICPA's CPA-Financial exam

Question #: 84
Topic #: 3

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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Shawnda

6 months ago

That's a good point, It's a bit tricky to determine whether it's a correction of an error or a change in estimate.

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Malcolm

6 months ago

I'm not so sure, it could also be considered a change in accounting estimate since the period of the insurance premium was incorrect.

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Onita

6 months ago

I agree with it seems like a correction of an error since the insurance premium was expensed incorrectly in 1992.

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Shawnda

6 months ago

I think the answer is C) Correction of an error in previously presented financial statements.

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Tonja

6 months ago

That's a good point, Zona. It could go either way depending on how Quo decides to classify it.

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Zona

6 months ago

But could it also be considered a change in accounting estimate since the time period was incorrect?

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Jesusita

6 months ago

I agree with Tonja. Quo realized the insurance premium was expensed incorrectly in 1992.

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Tonja

7 months ago

I think the answer is C) Correction of an error in previously presented financial statements.

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Lynda

7 months 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

7 months 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

7 months 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

7 months 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

7 months 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

8 months 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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Alison

6 months ago

Agreed, it seems like it was an error in the previous financial statement.

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Theola

6 months ago

C) Correction of an error in previously presented financial statements.

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