Question

On October 1, Company B records 1 year of prepaid rent in an income statement account then adjusts for the unexpired prepaid rent at the end of the period. Which of the following statements is true for Company B's financial statements at December 31 year-end?

a)Company B's assets will be lower than if the original entry were recorded in a balance sheet account.
b)Company B would have more expense than if the original entry were recorded in a balance sheet account.
c)Company B's assets and expense should be the same regardless of which account was used to record the original transaction.

Answer 1

The true statement regarding Company B's financial statements is that Company B's assets and expenses will be the same regardless of the account where the original prepaid rent transaction was recorded, due to the end-of-period adjustments. The correct option is B.

Step-by-step explanation:

On October 1, Company B records 1 year of prepaid rent in an income statement account then adjusts for the unexpired prepaid rent at the end of the period.

The statement that is true for Company B's financial statements at December 31 year-end is that Company B's assets and expense should be the same regardless of which account was used to record the original transaction. When prepaid rent is recorded initially as an expense, it is incorrectly expensed in the current period.

By the end of the year, an adjusting entry is needed to account for the amount of prepaid rent that has not yet expired; this amount is reported as an asset on the balance sheet, while the expense is adjusted in the income statement to reflect the amount of rent that has actually expired.

In effect, whether the original entry was made on the balance sheet or income statement, after adjusting entries, the financial statements will reflect the same amount of assets and expenses. The correct option is B.