Choice "B" is correct. During the year, prepaid expenses increased $5,000 from $10,000 to $15,000. Prepaid expenses represent assets where no benefit has been received yet. In accrual accounting, they are not officially expenses until there is associated benefit. Therefore, the $5,000 needs to be subtracted from $150,000. Also during the year, accrued liabilities increased from $5,000 to $25,000. This represents benefit received but no cash paid out yet. The expense of $20,000 (representing the increase) should be booked now (which creates the liability), and when cash payment is made, the liability will be removed. Given the starting point of $150,000, subtracting $5,000 and adding $20,000 will bring accrued expenses to $165,000.
Choice "d" is incorrect. This choice incorrectly subtracts, rather than adds, the $20,000 increase in accrued liabilities.
Choice "a" is incorrect. This choice incorrectly adds the $5,000 for the increase in prepaid expenses and subtracts the $20,000 increase in accrued liabilities.
Choice "c" is incorrect. This choice incorrectly adds, rather than subtracts, the $5,000 in prepaid expenses.