Answer:
C. Expense $300 of the expense on the income statement.
Explanation:
The correct answer is C.
On 31 December 2016, Sengal Company should report Rent expense of $300 on the income statement.
The initial journal entry was:
Dr Prepaid rent $1, 200
Cr Cash $1, 200
This journal entry recognizes the prepaid rent as an asset to the company because the rent is paid in advance, and they have not yet made use of the property they are renting. The payment is an annual payment, meaning that it is for 12 months. Assuming that the end of the financial year is at 31 December 2016, we know that a portion of the $1, 200 is in excess.
The monthly rent expense is $1,200 / 12 = $100. This means that only $100 is the expense for each month. By 31 December, only $300 was the rent expense. [ $100 x 3]. Sengal Company had paid $900 [$1, 200 - $300] in advance and that $900 was to remain as an asset (prepaid rent). The $300 should be recorded as an expense in the income statement and removed as an asset from the balance sheet.
The subsequent journal entry to record the expense is:
Dr Rent expense $300
Cr Prepaid rent $300
At the end of the financial year [31 December 2016], all income statement accounts must be correctly accounted for. This is because all income and expenses are closed of at year end and are not carried forward into the next financial year. This is according to the GAAP principle of ‘Matching’ which states that all income and expenses should be matched to the correct year in which they occur.
