Final answer:
To adjust their financial statements for rent paid in advance, Shamrock Co. must recognize 6 months' worth of rent as an expense as of December 31, 2017, which amounts to $4,500. This is calculated by dividing the total rent paid by the lease period and multiplying by the number of months that have elapsed.
Step-by-step explanation:
The scenario presented is about Shamrock Co. which paid $18,000 for rent covering 24 months, starting from July 2017 to June 2019. To comply with accrual accounting principles, they need to adjust their accounts at the end of the year on December 31, 2017. Since 6 months of the rent have passed, they should recognize this portion as rental expense, leaving the remaining amount as prepaid rent (an asset).
The monthly rent expense is calculated by dividing the total payment by the total coverage period (24 months). Hence, the monthly rent expense is $750 ($18,000 / 24 months). For 6 months, from July to December, this equals $4,500 ($750 x 6 months). The adjusting entry on December 31, 2017, requires recording $4,500 as rent expense and reducing prepaid rent by the same amount.
Through this adjustment, Shamrock Co. ensures that their financial statements accurately reflect the expenses incurred during the correct time period, representing a true and fair view of their financial position.