Question

On November 1, Year 1, Thomasson paid rent on its building for 2 years in the amount of $12,000. When the transaction was initially recorded, the full $12,000 was recorded as an expense using an alternative approach to record the prepayment. The adjusting journal entry on December 31, Year 1 requires a

a)credit to rent expense $11,000.
b)debit to rent expense $200.
c)credit to prepaid rent $11,000.
d)debit to prepaid rent $1,000.

Answer 1

The correct adjusting journal entry on December 31, Year 1, is to credit prepaid rent for $11,000, leaving only $1,000 as the rent expense for Year 1, which matches the two months of rent actually incurred in that year.

Step-by-step explanation:

Adjusting Journal Entry for Prepaid Rent

Thomasson paid two years of rent on November 1, Year 1, amounting to $12,000. This payment covers rent from November 1, Year 1, to October 31, Year 3. When this transaction was recorded, it was fully expensed, which is not consistent with accrual accounting principles. According to these principles, expenses should be recorded in the periods they are incurred. By the end of December 31, Year 1, only two months of rent should be recognized as an expense ($12,000 / 24 months = $500 per month, for two months totals $1,000). The remaining amount should be recorded as an asset (prepaid rent) since it is a prepayment for future periods.

The correct adjusting journal entry on December 31, Year 1, would be a credit to prepaid rent for the amount of rent that applies to future periods, which is $11,000 ($12,000 - $1,000). This credits the rent expense account and recognizes the prepaid rent as an asset on the balance sheet.

The correct answer is: c) credit to prepaid rent $11,000.