Multiple Choice
After a company purchases treasury stock on October 11, how should the stockholders' equity section of the balance sheet reflect this transaction?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
On November 1, a company rented office space and paid \$2,400 for three months' rent in advance. Which of the following is the correct journal entry to record this transaction?
A
Debit Rent Expense \$800; Credit Cash \$800
B
Debit Prepaid Rent \$2,400; Credit Cash \$2,400
C
Debit Cash \$2,400; Credit Rent Revenue \$2,400
D
Debit Rent Expense \$2,400; Credit Cash \$2,400
Verified step by step guidance1
Understand the nature of the transaction: The company is paying rent in advance for three months. This means the payment is a prepaid expense, which is an asset, not an immediate expense.
Identify the accounts involved: The two accounts affected are 'Prepaid Rent' (an asset account) and 'Cash' (another asset account). Prepaid Rent increases because the company now has a right to use the office space in the future, and Cash decreases because the payment is made.
Determine the type of entry: Since Prepaid Rent is an asset account, it is increased with a debit. Cash, also an asset account, is decreased with a credit.
Write the journal entry: Debit Prepaid Rent for \$2,400 to reflect the increase in the prepaid asset. Credit Cash for \$2,400 to reflect the decrease in cash.
Review the journal entry: Ensure that the total debits equal the total credits, which maintains the accounting equation (Assets = Liabilities + Equity). The correct journal entry is: Debit Prepaid Rent \$2,400; Credit Cash \$2,400.
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