Multiple Choice
An analysis provided by the company's management is included in the:
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
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On January 1, a company signed a two-year rental agreement policy at $4,800 per year in cash. At this time, the company included the payment of the lease in Rent Expense. The lease began immediately. The adjusting entry necessary when preparing the June 30 financial statements would include:
A
Debit Prepaid Rent $2,400; Credit Rent Expense $2,400
B
Debit Rent Expense $2,400; Credit Prepaid Rent $2,400
C
Debit Prepaid Rent $7,200; Credit Rent Expense $7,200
D
Debit Rent Expense $7,200; Credit Prepaid Rent $7,200
Verified step by step guidance1
Identify the total rent paid in advance: The company paid $4,800 per year for two years, so the total payment is $4,800 * 2 = $9,600.
Determine the rent expense for the period: Since the lease began on January 1 and the financial statements are prepared on June 30, the rent expense for six months is $4,800 / 12 * 6 = $2,400.
Calculate the prepaid rent: The total rent paid is $9,600, and the rent expense for six months is $2,400, so the prepaid rent is $9,600 - $2,400 = $7,200.
Prepare the adjusting entry: To adjust the rent expense and recognize the prepaid rent, debit Prepaid Rent for $7,200 and credit Rent Expense for $7,200.
Understand the impact: This adjusting entry decreases the Rent Expense on the income statement and increases the Prepaid Rent on the balance sheet, reflecting the correct allocation of rent over the period.
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