If a Company Records Prepayment of Expenses in an Asset

question 107

Multiple Choice

If a company records prepayment of expenses in an asset account,the adjusting entry when all or part of the prepaid asset is used or expired would:

• A)Result in a debit to an expense and a credit to an asset account.
• B)Cause an adjustment to prior expense to be overstated and assets to be understated.
• C)Cause an accrued liability account to exist.
• D)Result in a debit to a liability and a credit to an asset account.
• E)Decrease cash.

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Definitions:

Option Contract

A contract which grants the holder the right, but not the obligation, to buy or sell an asset at a specified price on or before a specified date.

Unilateral Contract

is a type of contract where only one party makes a promise or undertakes a performance obligation in exchange for an act by the other party, creating a binding agreement once the act is performed.

Revocable Offer

An offer that can be withdrawn by the offering party before it is accepted by the offeree, typically within a certain time frame.

Unilateral Offer

An offer made by one party where acceptance is performed through an action rather than a promise of action.