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C is corrent. The balance in the advertising expense account before adjustment is $695,000. This amount should be reduced by the $80,000 cost of printing sales catalogs for the year 3 sales campaign. The $80,000 is a prepaid expense at 12/31/Y2, and is properly matched against year 3 revenues. Advertising expense should be increased for December’s television advertising of $45,000 which was not billed until 1/2/Y3. This $45,000 must be accrued as an expense and a liability at 12/31/Y2. Therefore, the year 2 advertising expense should be $660,000 ($695,000 – $80,000 + $45,000).    
A is incorrect.   The balance in the advertising expense account before adjustment is $695,000. This amount should be reduced by the $80,000 cost of printing sales catalogs for the year 3 sales campaign. The $80,000 is a prepaid expense at 12/31/Y2, and is properly matched against year 3 revenues. Advertising expense should be increased for December’s television advertising of $45,000 which was not billed until 1/2/Y3. This $45,000 must be accrued as an expense and a liability at 12/31/Y2. Therefore, the year 2 advertising expense should be $660,000 ($695,000 – $80,000 + $45,000).   
B is incorrect.  The balance in the advertising expense account before adjustment is $695,000. This amount should be reduced by the $80,000 cost of printing sales catalogs for the year 3 sales campaign. The $80,000 is a prepaid expense at 12/31/Y2, and is properly matched against year 3 revenues. Advertising expense should be increased for December’s television advertising of $45,000 which was not billed until 1/2/Y3. This $45,000 must be accrued as an expense and a liability at 12/31/Y2. Therefore, the year 2 advertising expense should be $660,000 ($695,000 – $80,000 + $45,000).    
D is incorrect.  The balance in the advertising expense account before adjustment is $695,000. This amount should be reduced by the $80,000 cost of printing sales catalogs for the year 3 sales campaign. The $80,000 is a prepaid expense at 12/31/Y2, and is properly matched against year 3 revenues. Advertising expense should be increased for December’s television advertising of $45,000 which was not billed until 1/2/Y3. This $45,000 must be accrued as an expense and a liability at 12/31/Y2. Therefore, the year 2 advertising expense should be $660,000 ($695,000 – $80,000 + $45,000).