Question

On June 1, the company paid $1,200 in advance for 12 months of rent, with the rental period beginning on June 1. This $1,200 was recorded as Prepaid Rent. As of the end of the year, no entry has yet been made to adjust the amount initially recorded. -- Which ONE of the following will be included in the ADJUSTING ENTRY necessary on December 31?
DEBIT to PREPAID RENT for $700
DEBIT to CASH for $700
DEBIT to RENT EXPENSE for $700
CREDIT to PREPAID RENT for $500
CREDIT to CASH for $500
DEBIT to RENT EXPENSE for $500

Answer 1

Answer:

Debit to Rent Expense for $700

Explanation:

When the company paid $1,200 in advance for 12 months of rent, the monthly amount is $100 [$1,200 ÷ 12 months]. After seven months have passed, the prepaid rent that has expired is $700 [$100 × 7 months].

When the rent was prepaid, the resulting journal entry was:

(DR) Prepaid Rent, $1,200

(CR) Cash, $1,200

To expire seven months of prepaid rent, the resulting journal entry is:

(DR) Rent Expense, $700

(CR) Prepaid Rent, $700