Final answer:
The correct adjusting entry for Garcia Corporation as of December 31, 2020, is to debit Unearned Rent Revenue and credit Rent Revenue by $25,000. Correct answer is c.
Step-by-step explanation:
The question pertains to an accounting scenario where the Garcia Corporation received $60,000 in cash on August 1, 2020, for rent that covers one year in advance, and the initial recording was done by crediting Rent Revenue. As the rent covers a future period, it should initially be recorded as an unearned revenue, which is a liability because it represents services that are yet to be provided.
By December 31, 2020, five months of the rent have passed, so the portion that relates to these five months should now be recognized as earned revenue. The remaining seven months still represent unearned revenue.
When calculating, the portion of the rent revenue that has been earned from August to December is $60,000 (total rent) / 12 months * 5 months = $25,000. This amount should be recognized as earned revenue as of December 31, 2020. Therefore, the correct adjusting entry on December 31, 2020, would be to debit Unearned Rent Revenue and credit Rent Revenue by $25,000, which reflects that the company has now earned this portion of the rent.
The correct answer to the student's question is:
Option c. debit Unearned Rent Revenue and credit Rent Revenue, $25,000.