A business pays Rs. 36,000 for an annual maintenance contract beginning on 1 November. At 31 December, what amount should normally remain as a prepaid expense?
Correct answer: B. Rs. 30,000
- A. Rs. 6,000
- B. Rs. 30,000
- C. Rs. 36,000
- D. Rs. 3,000
Explanation
Two months of the contract, November and December, have expired, so expense is Rs. 6,000. The remaining ten months represent a future benefit and remain prepaid at Rs. 30,000. The full payment is therefore not charged to the current period.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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