Question

On November ​1, Smart Touch Learning pays $ 3000 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?

Answer 1

Smart Touch Learning will debit Rent Expense for $2,000 and credit Prepaid Rent for $2,000 on December 31 to adjust for the rent expenses of November and December that fall within the current fiscal period.

Step-by-step explanation:

At the end of its fiscal year on December 31, Smart Touch Learning must account for the rent it has paid in advance by making an adjusting entry in its financial records. Since the company has paid for three months of rent in advance ($3,000), and only two of those months (November and December) fall within the current accounting period, the company will need to recognize the expense for those two months.

To do this, Smart Touch Learning should debit Rent Expense for $2,000 (two-thirds of the $3,000) to recognize the rent expense for November and December, and credit Prepaid Rent for the same amount to reduce the prepaid rent asset account by the expense recognized. On January 1, the remaining $1,000 will be recognized in the new fiscal period when it becomes due.