Final answer:
To calculate the year-end adjustment for a prepaid rent expense, divide the total amount paid by the number of months, then multiply by the months elapsed to determine the amount used.
The remaining balance is reported as a prepaid expense.
Step-by-step explanation:
The student asks how to determine the amount of the adjustment for prepaid rent on December 31 for Company A that paid in advance for a year starting June 1.
To calculate this, we divide the total prepaid amount ($24,000) by the number of months in a year (12) to find the monthly rent expense, which is $2,000.
The rental agreement began on June 1, so by December 31, seven months of rent have been 'used' up. We multiply the monthly rent expense by the number of months used (7) to find out how much of the prepaid amount has been incurred, which is $14,000 ($2,000 * 7).
The remaining $10,000 ($24,000 - $14,000) is the amount that would be reported as prepaid expense on the balance sheet at year-end.
The adjustment that should be made on December 31 for the rent on this building is $12,000. Prepaid expenses refer to expenses paid in advance but not yet incurred or used.
In this case, Company A paid $24,000 in advance for a year of rent, which means that the rent has only been used for 6 months by December 31. Therefore, the adjustment should be made for the remaining 6 months of rent, which is $12,000 (24,000/2).