Question

6. Daymond John mentioned that in order to find strategic partner he paid $2,000 for a classified advertisement in the local (NY) newspaper. Assume that he paid for ad in December and the advertisement appeared in the newspaper in January of the next year. What journal entry did FUBU make when it recognized Advertisement expense in January? Assets = Llabilities Stockholders' Equity Net Revenue - Expense = Income Options Cash Prepaid Accounts Unearned + Retained + Common + + advertisement payable revenue Stock earnings 2,000 = + + + 2,000 + (2,000) = + +(2,000) -2,000 = (2,000) с (2,000) =(2,000) + + + D (2,000) + + + 2,000 2,000 =(2,000) А IIIIIIII + + + + DI DI

Answer 1

As the payment was made in December and the service was not yet received, it was treated as a "Prepaid Expense", accordingly Prepaid Advertisement account was debited at that time. Now in January, when the service has been received, it will no longer remain a prepaid expense, therefore, company will credit Prepaid Advertisement account and debit Advertisement Expense Account. This will result in decrease of prepaid advertisement, decrease of retained earnings, increase of expenses and decrease of net income.

Therefore, the answer is Option B.