CPA Financial Accounting and Reporting (FAR) : Prepaid Expenses
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Example Questions
Example Question #1 : Prepaid Expenses
Barkley Inc prepaid for an insurance policy on July 31, Year 2, in the amount of $6,000. The entry to adjust the prepaid expense account on December 31, Year 2, would include which of the following?
A debit of $3,500
A credit of $2,500
A debit of $2,500
A credit of $3,500
A credit of $2,500
Barkley needs to recognize insurance expense for 5 months (August-December). Insurance expense should be recorded at $500 per month ($6K/12 months). $500 x 5 months = $2,500, and this should be a credit to prepaid insurance to reduce that asset account.
Example Question #2 : Prepaid Expenses
Beaumont Inc is finalizing its prepaid insurance account at December 31, Year 3. The account includes $15,000 for a general insurance policy beginning and paid for on December 1, Year 3; $4,000 for an auto policy beginning January 1, Year 4; and $12,000 paid key man life insurance policy running from July 1, Year 2, through June 30, Year 3. What amount should be reported as an expense in Beaumont's Year 3 income statement?
$13,250
$17,750
$15,000
$17,250
$13,250
The company should expense what has been incurred as of the end of Year 3. This includes $1,250 for the general insurance policy ($15K/12 months x 1 month) and all $12K of the key man policy.
Example Question #3 : Prepaid Expenses
Which of the following transactions would be initially recorded in the prepaid expense account?
A company pre-pays a year-long subscription to a local newspaper, the cost of which it considers small
A retail company makes significant sales of gift certificates shortly before the holiday season, the majority of which it doesn't expect will be spent until after the new year
A company orders office supplies which it expects to use within the current month
A company pre-pays annual real estate taxes at the beginning of the fiscal year
A company pre-pays annual real estate taxes at the beginning of the fiscal year
Annual real estate taxes paid at the beginning of the year would be entered into prepaid taxes and then amortized to expenses throughout the year. Unearned revenue, immaterial prepaid subscriptions, and office supplies for the current period would not go to prepaid expenses.
Example Question #4 : Prepaid Expenses
Of the following, which would be an intangible asset?
Investments in stock
Goodwill
Leasehold improvements
Research and development
Goodwill
Of the following, goodwill is an intangible asset, R&D is an expense, investments are their own asset class, and leasehold improvements are capitalized.
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