Which of the following correctly describes the effects of initially recording prepaid insurance expense when cash is paid to purchase an insurance policy?
A)Total assets do not change.
B)Net income decreases.
C)Liabilities are decreased.
D)Stockholders' equity increases.

Question

Quizplus · Accepted Answer

When prepaid insurance expense is initially recorded, it is recorded as an asset (prepaid insurance) and a decrease in cash. The total assets do not change because the decrease in cash is offset by the increase in prepaid insurance. Net income does not decrease because this transaction does not impact revenues or expenses. Liabilities are not decreased because nothing was paid towards a liability. Stockholders' equity does not increase because this transaction does not impact retained earnings or contributed capital.

Which of the Following Correctly Describes the Effects of Initially