Question

On July 1, Runner's Sports Store paid $10.000 to Corona Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Runner's Sports Store is
a. Debit Rent Expense, $10,000; Credit Prepaid Rent, $2,500.
b. Debit Prepaid Rent, $2,500; Credit Rent Expense, $2,500.
c. Debit Rent Expense, $2,500; Credit Prepaid Rent, $2,500.
d. Debit Rent Expense, $10,000; Credit Prepaid Rent, $10,000.

Answer 1

Answer:

c. Debit Rent Expense, $2,500; Credit Prepaid Rent, $2,500

Explanation:

When the company pays $10,000 for four months of advance rent, it records the prepaid rent in an asset account named Prepaid Rent. The resulting journal entry is:

(Dr) Prepaid Rent, $10,000

(Cr) Cash, $10,000

With the passing of each month, the company expires one-fourth (1/4) of the prepaid rent expense (or $2,500), essentially reclassifying the expense from prepaid to expired. Therefore, after one month, the resulting journal entry is:

(Dr) Rent Expense, $2,500

(Cr) Prepaid Rent, $2,500