Question

On June 30, 2009, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.On June 30, 2009 Apricot should record:Select one:
a. A credit to an expense for $7,500.
b. A debit to an expense for $7,500
c. A debit to a prepaid expense for $7,500.
d. A credit to a prepaid expense for $7,500.
e. A debit to Cash for $7,500.

Answer 1

Answer:

c. A debit to a prepaid expense for $7,500.

Explanation:

Because the pament for management services are in-advance, is a right for Apricot, as now has the right to receive this management services for two-years

The entry will do the following:

it will recognize the prepaid expense

prepaid management services

and will post the cashoutflow for the amount paid.

prepaid management services 7,500 debit

                          cash                                       7,500 credit

From the option we are given:

a.- FALSE there is no expense in the entry

b.- FALSE there is no expense in the entry

d.- FALSE the prepaid expense is debited, not credited

e.- FALSE. cash is credit, not debit.

c.- CORRECT  there is a prepaid expense, which is being debited.