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.

---

Definitions:

Depreciation Expense

An accounting method that allocates the cost of a tangible asset over its useful life.

Fixed Assets

Long-term tangible assets used in the operations of a business, not expected to be converted to cash within a year.

Net Investment

The total amount of money spent on capital assets, such as buildings and machinery, minus any depreciation.

EBIT

Earnings Before Interest and Taxes, a measure of a firm's profit that includes all income and expenses (operating and non-operating) except interest and income tax expenses.