Question

What effect does ""recognizing revenue at the end of the accounting period for rent previously received in advance "" have on the accounting equation for an insurance company?

a. Liabilities decrease and stockholders' equity increases.
b. Assets decrease and liabilities decrease.
c. Assets increase and stockholders' equity increases.
d. Stockholders' equity increases and liabilities increase.

Answer 1

Recognizing revenue for rent received in advance decreases liabilities and increases stockholders' equity in an insurance company's accounting equation.

Step-by-step explanation:

When an insurance company recognizes revenue at the end of the accounting period for rent previously received in advance, it affects the accounting equation by decreasing liabilities and increasing stockholders' equity.

This is because the advance rent, which was initially recorded as a liability (unearned revenue), is now being recognized as revenue upon the fulfillment of the period it was meant to cover.

As the company has now earned the rent, the liability (unearned rent) decreases, and the earned rent is added to revenues on the income statement, which increases the net income and thereby increases the stockholders' equity. Therefore, the correct answer to the student's question is a. Liabilities decrease and stockholders' equity increases.

Therefore, the correct answar is a. Liabilities decrease and stockholders' equity increases.