Look at this:
Choice "D" is correct. The starting point for this problem is the $100,000 of debits to operating expenses. The increase in accrued liabilities represents operating expenses which have been incurred or used but not paid. To determine the amount of operating expenses which have been paid, the $12,000 increase in accrued liabilities must be subtracted from the $100,000 of operating expenses, because operating expenses would have been debited each time the accrued liability account was credited in the following manner.
|
Debit (Dr) |
Credit (Cr) |
| Operating Expense |
XXX |
|
| Accrued Liability |
|
XXX |
The increase in prepaid expenses represents operating expenses which have been paid but not yet used or incurred. To get the amount paid for operating expenses, the increase in prepaid expenses must be added to the $100,000 of operating expenses. An increase in the prepaid account represents cash payment of an operating expense not recorded as a debit to operating expense. The correct answer of $93,000 is calculated as $100,000 of debits to operating expenses less the $12,000 increase in accrued liabilities plus the $5,000 increase in prepaid expenses.
Why can't they give us a simple explanation; instead, every question, I have to ask AI to give me a simplified version of this!!