C is corrent. On 1/1/Y2, the balance of prepaid royalties was $65,000. Ott makes no entries to this account until year-end, so the 12/31/Y2 balance before adjustment was still $65,000. On 10/31/Y2, Ott made a $110,000 royalty payment which included payment in advance for year 3 royalties. However, under Ott’s system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. At 12/31/Y2, Ott made a credit adjustment to royalty expense: | Prepaid royalties | 25,000 | | | | Royalty expense | | 25,000 |
Therefore, the 12/31/Y2 balance of prepaid royalties is $90,000 ($65,000 + $25,000).A is incorrect. On 1/1/Y2, the balance of prepaid royalties was $65,000. Ott makes no entries to this account until year-end, so the 12/31/Y2 balance before adjustment was still $65,000. On 10/31/Y2, Ott made a $110,000 royalty payment which included payment in advance for year 3 royalties. However, under Ott’s system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. At 12/31/Y2, Ott made a credit adjustment to royalty expense: | Prepaid royalties | 25,000 | | | | Royalty expense | | 25,000 |
Therefore, the 12/31/Y2 balance of prepaid royalties is $90,000 ($65,000 + $25,000). B is incorrect. On 1/1/Y2, the balance of prepaid royalties was $65,000. Ott makes no entries to this account until year-end, so the 12/31/Y2 balance before adjustment was still $65,000. On 10/31/Y2, Ott made a $110,000 royalty payment which included payment in advance for year 3 royalties. However, under Ott’s system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. At 12/31/Y2, Ott made a credit adjustment to royalty expense: | Prepaid royalties | 25,000 | | | | Royalty expense | | 25,000 |
Therefore, the 12/31/Y2 balance of prepaid royalties is $90,000 ($65,000 + $25,000). D is incorrect. On 1/1/Y2, the balance of prepaid royalties was $65,000. Ott makes no entries to this account until year-end, so the 12/31/Y2 balance before adjustment was still $65,000. On 10/31/Y2, Ott made a $110,000 royalty payment which included payment in advance for year 3 royalties. However, under Ott’s system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. At 12/31/Y2, Ott made a credit adjustment to royalty expense: | Prepaid royalties | 25,000 | | | | Royalty expense | | 25,000 |
Therefore, the 12/31/Y2 balance of prepaid royalties is $90,000 ($65,000 + $25,000). |
