Question

Item 2 On July 1 of the current calendar year, Plum Co. paid $8,000 cash for management services to be performed over a two-year period beginning July 1. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Plum would include:

Answer 1

- July 1st - December 31st (6 months)

- Here, $8,000 is paid for 2 years (24 months)

So, expenses for 6 month = $8,000 * 6/24 = $2,000

Date Journal Entry Debit Credit

Expense $2,000

Prepaid expense $2,000

(To record the expense)