The term 'Prepaid Expense' is treated as: MCQ with Answer and Explanation

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The term 'Prepaid Expense' is treated as:

A. An expense

B. An asset

C. A liability

D. A loss

Answer: Option B

Solution (By JKSSB Mock Tests)

Prepaid expenses are treated as current assets because they represent future economic benefits for which payment has already been made.

This question belongs to: Accountancy and Statistics Accountancy and Book Keeping

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Question #1

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Under Ind AS 102, if a share-based payment transaction is settled in cash (e.g., Stock Appreciation Rights), how is it measured?

A. At the fair value of the equity instruments at the grant date

B. At the fair value of the liability at each reporting date and at the date of settlement

C. At the intrinsic value of the equity instruments at the vesting date

D. At the fair value of the liability at the grant date, not subsequently remeasured

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Correct Answer: Option B

Explanation:
Ind AS 102 requires cash-settled share-based payments to be measured at the fair value of the liability, which must be remeasured at the end of each reporting period and at the date of settlement until it is paid.

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Question #2

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If rent paid is Rs 10,000 and prepaid rent at year-end is Rs 2,000, what is the rent expense for the current year under accrual accounting?

A. Rs 8,000

B. Rs 12,000

C. Rs 10,000

D. Rs 2,000

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Correct Answer: Option A

Explanation:
Current year expense = Paid amount - Prepaid for next year = 10,000 - 2,000 = Rs 8,000.

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Question #3

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S1: In a partnership, if the existing profit-sharing ratio is 3:2 and the new ratio is 1:1, the sacrificing/gaining ratio is 1:1. S2: If the old ratio is 3:2 and the new ratio is 2:3, Partner A sacrifices 1/5th and Partner B gains 1/5th. Which statement(s) is/are correct?

A. S1 only

B. S2 only

C. Neither S1 nor S2

D. Both S1 and S2

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Correct Answer: Option D

Explanation:
In S1, Sacrificing = Old - New. A: 3/5 - 1/2 = 1/10. B: 2/5 - 1/2 = -1/10. Ratio is 1:-1, which means 1:1 sacrificing/gaining. In S2, A: 3/5 - 2/5 = 1/5 sacrifice. B: 2/5 - 3/5 = -1/5 (gain). Both are correct.

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