Multiple Choice
Which of the following statements is correct about completing a work sheet in relation to adjusting journal entries and prepaid expenses?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which of the following expenditures related to prepaid expenses should be capitalized on the balance sheet?
A
Monthly utility bill paid in the current month
B
Payment of one year's rent in advance for office space
C
Interest expense incurred but not yet paid
D
Wages paid to employees for work performed this month
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed or used in future periods. These are recorded as assets on the balance sheet until the benefit is realized.
Analyze each option to determine whether it qualifies as a prepaid expense: For an expenditure to be capitalized as a prepaid expense, it must provide future economic benefits and not be immediately consumed or incurred.
Option 1: Monthly utility bill paid in the current month - This is an expense incurred for the current period and does not provide future economic benefits. Therefore, it should not be capitalized.
Option 2: Payment of one year's rent in advance for office space - This payment provides future economic benefits as the office space will be used over the next year. It qualifies as a prepaid expense and should be capitalized on the balance sheet.
Option 3: Interest expense incurred but not yet paid and Option 4: Wages paid to employees for work performed this month - Both are expenses related to the current period and do not provide future economic benefits. These should be recorded as expenses in the income statement, not capitalized.
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