Question

On August 1st, Shiva, Inc, paid $27,600 to Landlord Realty for 12 months rent beginning on October 1st. The company did the correct recording on August 1st. If financial statements are prepared on December 31 st, the adjusting journal entry (AJE) to be made by Shiva is: a. increase Rent Expense $27,600, Decrease PrePaid Rent $27,600 b. Increase Rent Expense $6,900, Decrease PrePaid Rent $6,900 c. Increase Rent Expense $27,600, Decrease Cash $27,600 d. Increase Rent Expense $9,200, Decrease PrePaid Rent $9,200

Answer 1

The correct adjusting journal entry (AJE) to be made by Shiva on December 31st is option d. Increase Rent Expense $9,200, Decrease PrePaid Rent $9,200.

Step-by-step explanation:

The correct adjusting journal entry (AJE) to be made by Shiva on December 31st is option d. Increase Rent Expense $9,200, Decrease PrePaid Rent $9,200.

An adjusting journal entry is made at the end of an accounting period to bring accounts up to date and to match revenues and expenses to the correct period. In this case, Shiva, Inc. paid $27,600 on August 1st for 12 months rent beginning on October 1st. By December 31st, 3 months have passed since the rent payment, so the remaining prepaid rent is $24,600 ($27,600 - $3,000). To reflect the portion of rent that has been used up in December, the Rent Expense account should be increased by $9,200 and the PrePaid Rent account should be decreased by the same amount.