Multiple Choice
In the context of adjusting journal entries and prepaid expenses, which of the following best describes how a company can achieve a balance between the costs of carrying inventory and the risk of running out?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
In the context of adjusting journal entries for prepaid expenses, which of the following will cause the time period over which a fixed amount is recognized as an expense to be extended?
A
Increasing the initial prepaid amount without changing the periodic expense
B
Recognizing the entire prepaid amount as an expense immediately
C
Recording the prepaid expense as a liability instead of an asset
D
Decreasing the initial prepaid amount while keeping the periodic expense the same
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. These are initially recorded as assets and then expensed over time as the benefits are consumed.
Analyze the options provided: The question asks which action will extend the time period over which a fixed amount is recognized as an expense. This means we are looking for a scenario where the expense is spread out over a longer duration.
Option 1: Increasing the initial prepaid amount without changing the periodic expense. If the prepaid amount increases but the periodic expense remains constant, the expense will be spread over a longer time period because there is more prepaid value to allocate over the same periodic rate.
Option 2: Recognizing the entire prepaid amount as an expense immediately. This would not extend the time period; instead, it would eliminate the time period entirely by expensing the full amount upfront.
Option 3: Recording the prepaid expense as a liability instead of an asset. This is incorrect because prepaid expenses are assets, not liabilities, and this action would not affect the time period of expense recognition. Option 4: Decreasing the initial prepaid amount while keeping the periodic expense the same. This would shorten the time period because there is less prepaid value to allocate over the same periodic rate.
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