Question

On October 1, Company B records 1 year of prepaid rent in an income statement account then adjusts for the unexpired prepaid rent at the end of the period. What would be true for Company B's financial statements at December 31 year-end?

Answer 1

Answer:

The first journal entry was not the most appropriate, but since the mistake was correctly adjusted at the end of the year, both assets and expenses will be the same whether they did it correctly the first time or they had to adjust a mistake at the end of the year.

E.g. something like this happened

October 1, rent expense for 1 year

Dr Rent expense 12,000

    Cr Cash 12,000

December 31, adjustment to rent expense

Dr Prepaid rent 10,000

    Cr Rent expense 10,000

they should have recorded it as:

October 1, prepaid rent for 1 year

Dr Prepaid rent 12,000

    Cr Cash 12,000

December 31, adjustment to rent expense

Dr Rent expense 2,000

    Cr Prepaid rent 2,000

Whichever way you recorded the transactions, the balances a the end of the year would be:

prepaid rent (asset) $10,000

rent expense (expense) $2,000