Answer:
The adjusting entry for prepaid rent would record $12,000 as Rent Expense, reflecting the rent used for four months of occupancy. This entry ensures expenses are matched to the period they relate to, which is crucial for accurate income statements.
Step-by-step explanation:
Understanding the Adjusting Entry for Prepaid Rent
The scenario described involves a company that has prepaid rent for a commercial lease. On September 1, 2013, the company made a payment of $18,000 covering six months of rent at $3,000 per month, debiting Prepaid Rent. By December 31, 2013, four months of the lease period have elapsed, and the company needs to recognize this expense. The appropriate adjusting entry will involve a debit to Rent Expense and a credit to Prepaid Rent for the amount of rent that has been 'used up' over these four months. The total amount to be recognized as an expense by December 31 is $12,000, calculated as $3,000 per month times four months.
Adjusting entries are crucial for ensuring that expenses are recorded in the period in which they are incurred. Prepaid rent is an asset on the balance sheet until it is used, at which point it becomes an expense on the income statement. Accurate financial statements depend on such adjustments, especially at period ends.
Additionally, the given scenarios of the Yoga Center illustrate how fixed and variable costs impact the profitability depending on the level of operations and revenues. These decisions, including the one about rent control, reflect the analysis of economic choices based on different operational scenarios.