Hour Place Clock Repair paid $2,400 cash in advance for a six month advertising contract with the local newspaper. According to the matching principle, if 2 months of the contract has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Advertising Expense on the Income Statement?

Question

Quizplus · Accepted Answer

According to the matching principle, expenses should be recorded in the same period as the revenues they help to generate. In this case, Hour Place Clock Repair paid for a 6-month advertising contract in advance, but only 2 months have expired by the end of the current fiscal year. Therefore, only 2/6 or 1/3 of the total cost should be recognized as advertising expense for the current year.

$2,400 x 1/3 = $800

Therefore, the correct answer is C) $800.

Hour Place Clock Repair Paid $2,400 Cash in Advance for a Six