Accrual Adjustment for Prepaid Advertising

Steps:

• Total payment is $750, with$500 prepaid for next year, so current-year expense is $250.
• Incorrect treatment expenses all $750, reducing profit by$750 and net assets by $750.
• Correct treatment records $250 as expense and$500 as prepaid asset.
• Adjustment increases profit by $500 (less expense) and net assets by$500 (new asset).

Why D is correct:

• Accrual principle requires deferring prepaid expenses as assets until incurred, increasing current profit and net assets by $500 versus full expensing.

Why the others are wrong:

• A: Profit increases, not decreases, from reduced expense.
• B: Both profit and net assets increase, not decrease.
• C: Net assets increase via asset recognition, not decrease.

Final answer: D