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: 11) g all prepaid expenses to asset accounts at the time of 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. credit to a prepaid expense for $5,625. 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:

1 Plum company has paid USD 7500 for management service to be performed for next two year to be treated as prepaid on the date of payment i.e. July 1

2 Payment made on July 1 for two year means for coming 24 months.

3 Hence USD 7500/24 equals to USD 312.5 which should be charged in Expense account on monthly basis.

4 Period Between July to December is of 6 months

5 Hence the amount to be transferred to expense account would be USD 312.5*6 equivalent to USD 1875

6 Hence E would be correct choice for adjustment entry of prepaid