Question

Panjim's prepaid expense account consists only of garage rental prepayments. Its 2015 beginning and ending balance were the same. Which one of the following statements must be true?Panjim had no garage rental expenses during 2015Panjim's prepaid expense account balance never varied during 2015Panjim's prepaid expense account balance varied during 2015None of the above statements is true

Answer 1

Answer:

Panjim's prepaid expense account balance varied during 2015

Explanation:

I will use the following example:

Panjim's prepaid garage expense was $1,000 on January 1, 2015

His garage expenses are $250 per quarter

After 6 months,  the accrued expenses will be $500, so the balance of the prepaid account = $500

Pinjam incurs in the same garage expenses during the rest of the year, but on December 31, 2015, he prepays the garage expenses for 2016, so the ending balance of the account is $1,000 also.

Prepaid expenses is an asset account, it is not the same as garage expenses which belongs to the income statement. Prepaid expenses must be accrued and the account's balance decreases as time passes, so it will vary during the year.