Question

On 1 July the Winter Shoe Store paid $6,000 to Ace Realty for 6 month’s rent beginning 1 July. Prepaid Rent was debited for the full amount. If financial statements are prepared on 31 July, the adjusting entry to be made by the Winter Shoe Store is:

Select one:

a. Debit Rent expense, $6,000; Credit Prepaid rent, $6,000

b. Debit Prepaid rent, $1,000; Credit Rent expense, $1,000

c. Debit Rent expense, $1,000; Credit Prepaid rent, $1,000

d. Debit Rent expense, $6,000; Credit Prepaid rent, $6,000

e. None of the above

Answer 1

Answer: Option c. Debit Rent expense, $1,000; Credit Prepaid rent, $1,000
Rent is paid for 6 months on 1st july. financial statements are prepared on 31 July
Thus, Rent expense will be considered only for the month of July and rest 5 months rent will be considered as prepaid rent.
Journal entry for the same is as follows:
	Debit	Credit
Rent expense	$      1,000
Prepaid rent	$      5,000
Cash		$      6,000
Explanation:
Rent expense debited for the month of July.
Prepaid rent is an asset having debit balance and being created for 5 month of rent paid.
However, Winter shoe store debited full amount as prepaid rent.
Thus adjusting entry will be:
	Debit	Credit
Rent expense	$      1,000
Prepaid rent		$      1,000
Explanation:
Rent expense debited as it was not recorded as expense for the month of July.
Prepaid rent credited for the july month rent. As full amount was recorded as prepaid rent. After this adjustment entry balance in prepaid rent account will be $ 5,000 i.e for 5 months which is correct.
Thus, Adjustment entry will be Debit Rent expense, $1,000; Credit Prepaid rent, $1,000