Question

If a company pays for a one-year insurance policy that will expire next year, then a. liabilities increase and liabilities decrease. b. assets increase and liabilities decrease. c. assets decrease and liabilities increase. d. assets increase and stockholders' equity increases. e. assets increase and assets decrease.

Answer 1

Answer: Option E

Explanation: In simple words, assets refers to the resources owned by a firm that helps it to generate revenue by operating its business.

In the given case, if the company pays for an insurance that will expire next year, then it will have the dual effect that most of the accounting transactions do.

The amount paid will result as a prepaid expense resulting in increase in asset but also it will decrease the asset balance with the amount of cash spend.

Hence from the above we can conclude that the correct option is E.