Question

On November 1, Smart Touch Learning pays $30,000 for the next three months of its rent (November through January). At the end of its fiscal period on December 31, Smart Touch Learning would record which adjusting entry?

a) Debit Rent Expense $30,000; Credit Prepaid Rent $30,000
b) Debit Rent Expense $10,000; Credit Cash $10,000
c) Debit Prepaid Rent $30,000; Credit Cash $30,000
d) Debit Prepaid Rent $10,000; Credit Rent Expense $10,000

Answer 1

The correct adjusting entry to record the used portion of the advance payment for rent would be a debit to Rent Expense for $20,000 since two months of rent have passed, not the $10,000 or $30,000 options given.

Step-by-step explanation:

When Smart Touch Learning pays $30,000 for three months of rent in advance, this creates a prepaid expense. On December 31, only two months of rent have been used (for November and December), which amounts to $20,000 ($10,000 per month). Therefore, Smart Touch Learning needs to recognize this expense for the fiscal period ending on December 31. The correct adjusting entry would be a debit to Rent Expense for $20,000 and a credit to Prepaid Rent for $20,000.

The remaining $10,000 would stay on the balance sheet as Prepaid Rent, representing the rent for January that has not yet been incurred as an expense. Thus, the correct answer from the options given would be none of them since none reflects the two months of rent used by December 31.