Question

altimore company paid $3,600 cash for the right to use office space during the coming year. which of the following shows how this event would affect baltimore’s financial statements?

Answer 1

The $3,600 paid for office space is recorded as a prepaid expense, which is an asset on the balance sheet and will be amortized as an expense over the year, affecting net income.

Step-by-step explanation:

Affect on Baltimore's Financial Statements

When Baltimore company pays $3,600 cash for the right to use office space during the coming year, this payment is considered a prepaid expense, which is an asset on the balance sheet. Initially, there is no effect on the income statement because the expense has not yet been incurred. Over time, as the office space is used, the prepaid expense will be expensed and reduce net income. The cash payment will decrease the company's cash balance, which is also reflected on the balance sheet.

In summary, the immediate impact is a decrease in cash and an increase in prepaid expenses (an asset). As the year progresses, these prepaid expenses will be recognized proportionally as an expense on the income statement each month, affecting net income.