If a Company Records Prepayment of Expenses in an Asset

question 233

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

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Definitions:

Weighted Index

A stock market index in which each constituent stock affects the index in proportion to its market value.

Treasury Notes

Medium-term interest-bearing securities issued by the U.S. government with maturity terms typically between 2 to 10 years.

Initial Maturities

Refers to the initial period before a financial instrument or security matures or expires.

Commercial Paper

A short-term unsecured debt instrument issued by corporations to finance their immediate operational needs.