Question

On july 1 of the current calendar year, plum co. paid $7,500 cash for management services to be performed over a two-year period beginning july 1. plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. the adjusting entry on december 31 of the current year for plum would include:

Answer 1

Answer:

The correct answer is:  A debit to a prepaid expense and a credit to Cash for $7,500.

Explanation:

A prepaid expense is an asset on the Balance Sheet. Due to accounting principles expenses are often accrued on the balance sheet and expensed in a later period. Often, an expense is accrued to match to the earned revenue for which it was incurred. This is done for expenses related to manufacturing goods that will be sold to customers at a later date.

In that case, in the Plum Co. adjusting entry by December 31st the $7,500 prepaid expense mus be debited and credited to cash for the total amount.

Answer 2

Dec 31              Management Services ....................................$1875

                           To Prepaid Expenses.....................................................$1875

(Being prepaid expenses recognised for the year)