Question

Which of the following affects both the balance sheet and the income statement? and why? (A)...

Which of the following affects both the balance sheet and the income statement? and why?

(A) Purchase of inventory
(B) Retirement of a fully depreciated machine
(C) Collection of accounts receivable
(D) Amortization of prepaid insurance correct
(E) Declaration of a cash dividend
Business   Accounting   
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Answer #1

(D) Amortization of prepaid insurance

This is because there will be a current asset (in the balance sheet) for the total amount of insurance & also an expense (in the income statement), each time the insurance is due and paid. This will also reduce the prepaid asset value.

For example: If a company pays $1,200 for an insurance policy covering the next 1 year, it will record a current asset of $1,200 at the time of payment to represent this prepaid amount. For every month during the year, the company would expense $100 which would even reduce the prepaid asset value.

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