Prepayments for Julianna Company decreased by $2,000 during Year 3, the firm expensed less cash during Year 3 for new prepayments than it expensed prepayments of earlier years.Assume that all prepayments relate to selling and administrative activities.The journal entries that Julianna Corporation made in the accounting records during the year had the following combined effect: Selling and Administrative Expenses ..............35,500
Cash ........................................... 33,500
Prepayments ......................................2,000
To explain the change in the statement of cash flows T-account work sheet for Prepayments
A)add back $33,050 to net income.
B)add back $2,000 to net income.
C)subtract $2,000 from net income.
D)subtract $33,500 from net income.
E)subtract $2,000 from retained earnings.

Question

Quizplus · Accepted Answer

Since the prepayments decreased by $2,000 during Year 3, it means that $2,000 worth of prepayments that were expensed in earlier years were not expensed in the current year. This means that we need to add back $2,000 to net income in the statement of cash flows to correct for the non-cash expense. The $33,500 cash paid for new prepayments during the year is already included in the operating activities section of the statement of cash flows. Therefore, we do not need to add or subtract this amount from net income.

Prepayments for Julianna Company Decreased by $2,000 During Year 3