Question

N January 1, Kim pays for two years of rent in advance. The effect of this transaction

a) Decreases assets and liabilities
b) Increases assets and decreases liabilities
c) Increases assets and liabilities
d) Has no impact on assets or liabilities

Answer 1

Kim's advance payment for two years of rent decreases her assets, specifically cash, and has no effect on liabilities, as no debt or obligation is created through this payment.

Step-by-step explanation:

When Kim pays for two years of rent in advance on January 1st, the effect of this transaction is that it decreases assets and has no impact on liabilities. The prepayment of rent reduces Kim's cash on hand, which is an asset, because she is using cash to pay for the future right to occupy property. However, since the transaction is not creating any new debt, liabilities remain unchanged. Therefore, the transaction decreases assets without affecting liabilities.

The effect of Kim paying for two years of rent in advance on January 1 is that it increases assets and decreases liabilities. When Kim pays for two years of rent in advance, it increases the amount of prepaid rent as an asset on the balance sheet. At the same time, it decreases the amount of rent payable as a liability since the rent is already paid. Therefore, option b) increases assets and decreases liabilities is the correct answer.