question archive On July 1 the Ayayai Corp

On July 1 the Ayayai Corp

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On July 1 the Ayayai Corp. paid $22560 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Ayayai Corp. is:

 

A)debit Rent Expense, $22560; credit Prepaid Rent, $3760.

B) debit Rent Expense, $3760; credit Prepaid Rent, $3760

C) debit Rent Expense, $22560; credit Prepaid Rent, $18800.

D) debit Prepaid Rent, $3760; credit Rent Expense, $3760

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solution: -

Option "B" is the correct answer

 

Step-by-step explanation

Explanation: -

Ayayai corporation paid rent for 6 months is $22,560 on 1, July but 1/6 of the balance in the rent account is treated as current year rent and transferred from prepaid rent (Asset ) account. While passing journal entry company

 debit to Rent expenses ( reason all expenses are debit) it is nominal account and credit to prepaid rent (what goes out credit) it is real account.

company need to pass adjustment entry for the current year's rent.  

 

Conclusion: -

Therefore $22,560 / 6 = $3,760 will be treated as expense for current year.

Adjusting entry for prepaid Rent at the end of the year as follows under: -

Date Transactions Debit credit
31 st July Rent expenses A/c $3,760  
       To Prepaid rent A/c   $3,760

Option "B" is the correct answer