On July 1 of the current calendar year, Plum Co. paid $9,500cash for management services...

On July 1 of the current calendar year, Plum Co. paid $9,500 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:

Multiple Choice

A credit to a liability and a debit to a prepaid expense for $2,375.
A debit to a prepaid expense and a credit to an expense for $2,375.
A debit to a prepaid expense and a credit to Cash for $7,125.
A debit to an expense and a credit to a prepaid expense for $2,375.
A debit to an expense and a credit to a prepaid expense for $7,125.

Solutions

Expert Solution

On July 1 of the current calendar year, Plum Co. paid $9,500 cash for management services to be performed over a two-year period beginning July 1.

Expense related to 6 months from July 1 to December 31 of the current year = 9,500 x 6/24

= $2,375

The adjusting entry on December 31 of the current year for Plum would be as under:

Journal

Date	Account title	Debit	Credit
Dec. 31	Expense	2,375
	Prepaid expense		2,375

ekkarill92 answered 2 years ago

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