Question

On October 1, 2017, Jethro Inc. paid $6,000 for the next 6 months of rent. How did the accounting entry

made on October 1 affect the accounting equation?
a. Total assets increased, total liabilities increased, total equity remained the same
b. Total assets decreased, total liabilities decreased, total equity remained the same
c. Total assets increased, total liabilities remained the same, total equity increased
d. Total assets remain unchanged, total liabilities remained the same, total equity remained the same

Answer 1

After Jethro Inc. paid $6,000 for future rent, their total assets remained unchanged, liabilities remained the same, and equity also remained unchanged, since the decrease in cash was offset by an equal increase in prepaid rent.

Step-by-step explanation:

When Jethro Inc. paid $6,000 for the next 6 months of rent on October 1, 2017, the accounting entry affected the accounting equation in a specific way. The payment reduced the company's cash balance, an asset, by $6,000. Meanwhile, it created a prepaid rent account (another asset) for the same amount, because the payment is for a future expense. As a result, there is no change in total assets since one asset decreased while another increased by the same amount. Since the rent expense will be recognized in the future, there's no immediate impact on total equity or liabilities on October 1, 2017. Therefore, the correct answer is: d. Total assets remain unchanged, total liabilities remained the same, total equity remained the same.