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 recordin cash payment. The adjusting entry on December 31 of the current year for Plum would include:
A) A credit to a liability and a debit to a prepaid expense for $1,875.
B) A debit to a prepaid expense and a credit to Cash for $5,625.
C) A credit to a prepaid expense for $5,625.
D) A debit to a prepaid expense and a credit to an expense for $1,875.
E) A debit to an expense and a credit to a prepaid expense for $1,875.

Answer 1

Answer:

The adjusting entry on December 31 of the current year for Plum would include:

E) A debit to an expense and a credit to a prepaid expense for $1,875.

Explanation:

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.

Management services fee per month = $7,500/24 = $312.5

From July 1 to December 31 of the current year, management services has been performed for 6 months.

The amount of Management services expense should be record:

$312.5 x 6 = $1,875

The adjusting entry:

Debit Management services expense $1,875

Credit Prepaid expense $1,875