Question

In: Accounting

Medina rents a portion of its parking lot to the neighboring business under a long-term lease...

Medina rents a portion of its parking lot to the neighboring business under a long-term lease agreement that requires payment of rent 6 months in advance on April 1 and October 1 of each year. The October 1, 2019, payment was made and recorded as prepaid rent.  Indicate whether or not this item requires an adjusting entry at December 31, 2019, and if does, indicate which accounts are increased by the adjustment and which are decreased.

Solutions

Expert Solution

  • YES, this item requires an adjusting entry at Dec 31, 2019.
  • This is because when Rent is received as an advance for 6 months on 1 Oct, it was recorded as Prepaid Rent.
  • By the time the Dec 31 came, the period passed = 3 months (Oct, Nov and Dec)
  • Hence, adjustment is require to record expense for these 3 months on Dec 31, 2019.
  • The adjusting entry will be:

Accounts title

Debit

Credit

Rent Expenses

$                                   XXX

     Prepaid Rent

$                  XXX

(rent expired for 3 months)

  • Since ‘rent expense’ being an expense account is DEBITED, it will be INCREASED.

‘Prepaid Rent’ being an Asset account, is credited. This will be lead to a DECREASE.

Account to be Increased = Rent Expenses

Account to be decreased = Prepaid Rent.


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