Question

The Yellow Buttercup Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $4,900 for seven months of advertising. How much advertising expense should Yellow Buttercup Law Firm record for the two months ending February 28 under the: a.cash basis and b. accrual basis? Under the cash basis, yellow Buttercup Law Firm will record $..... of advertising expense for the two months ending February 28. Under the accrual basis, Yellow Buttercup Law Firm will record $.... of advertising expense for the two months ending February 28.

Answer 1

Prepaid expenses are expenses which are paid in advance., before it is getting due. Eg- payment for telephone,internet, advertisement etc...

There are two types of accounting:-

1.Cash basis - where the full amount paid will be treated as expense immediately,i.e.in the year of payment itself.

In the given case of Yellow Buttercup Law firm, total amount paid of $4900 will be treated as advertising expense as on February 28th.

2.Accrual basis- where the amount which is actually due and paid only will be treated as expense.

In the given case of Yellow Buttervip Law firm will treat $1400 (4900÷7=700 per Month) Hence for two months for January and February 700*2=1400 will be created as advertising expense as on 28th February.