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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

At 1 January 20X6 Dalton Co had a prepayment of $2,400 for software licences. During the year it paid $14,400 for licences, and at 31 December 20X6 the prepayment was $3,000. What is the licence expense in profit or loss for 20X6?

The expense is $13,800. Add the opening prepayment of $2,400 to the cash paid of $14,400, then deduct the closing prepayment of $3,000. The opening balance relates to this year's cost, while the closing balance relates to next year.

  1. A$13,800Correct
  2. B$15,000
  3. C$19,800
  4. D$14,400

Explanation

Expense = opening prepayment + cash paid - closing prepayment = 2,400 + 14,400 - 3,000 = $13,800. $15,000 results from subtracting the opening and adding the closing balance, which reverses the signs.

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