Question

Molly Co. makes adjustments on a monthly basis. On July 1, 2017, Molly Co. paid $18,000 to Rent-An-

Office for rent covering 24 months from July 2017 through June 2019. The adjusting entry needed at
December 31, 2017 by Molly Co. will:
a. Increase liabilities and decrease equity.
b. Increase assets and decrease equity.
c. Decrease equity and decrease assets.
d. Decrease liabilities and increase equity.
e. Decrease liabilities and decrease assets.

Answer 1

The adjusting entry required by Molly Co. at December 31, 2017, will decrease equity and decrease assets, as it records the used portion of the prepaid rent as an expense.

Step-by-step explanation:

The question pertains to making an adjusting entry on Molly Co.'s financial statements to account for the rent expense that has been used up by December 31, 2017. Since the payment was made for 24 months of rent in advance, Molly Co. initially recorded this payment as a prepaid expense, which is an asset. As time passes, Molly Co. needs to convert a portion of this asset to an expense to reflect the rent that has been 'used' over the period.

By December 31, 2017, six months of rent have passed, which amounts to $18,000 / 24 months * 6 months = $4,500. The adjusting entry will debit Rent Expense (increasing expenses, thus decreasing equity because profits are lower) and credit Prepaid Rent (decreasing assets because the benefit has been consumed).

Therefore, the correct answer to the question is: c. Decrease equity and decrease assets.