Kelly Company had cash receipts from customers in 2014 of $142,000. Cash payments for operating expenses were $97,000. Kelly has determined that at January 1, accounts receivable was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was $18,600, and prepaid expenses were $23,200. Compute operating expenses.

A. Payments for Operating Expenses$97,000
-Increase in prepaid expenses
(23,200-17,500)($5,700)
Operating Expenses$91,300

The answer shown in the question,$91300 is correct

Explanation:

In computing the operating expenses,the proforma below applies:

Cash payment for operating expenses =$97000

add prepayment for last year                  =$17500

less prepayment this year                        =($23200)

Operating expenses                                   $91700  

The prepaid expenses last year were added because they were paid in advance last year for expenses incurred this year while prepaid expenses this year were deducted since they are prepaid this year for expenses to be incurred next year.

This above is valid because expenses are to recognized when incurred not when paid for.

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