Forrester Company signed a two-year lease on July 1 and paid the $17,400 total rent in advance. Forrester recorded the transaction as a debit to Prepaid Rent and a credit to Cash.
What adjusting entry should Forrester make on December 31 (no previous adjustment has been made)?
A) Prepaid Rent 13,050
Rent Expense 13,050
B) Prepaid Rent 4,350
Rent Expense 4,350
C) Rent Expense 8,700
Prepaid Rent 8,700
D) Rent Expense 4,350
Prepaid Rent 4,350
E) None of the above

Question

Quizplus · Accepted Answer

The total rent for two years is $17,400, so the annual rent is $8,700. Since the lease started on July 1, only six months of rent should be recognized by December 31, which is $8,700 / 2 = $4,350. Therefore, the adjusting entry should debit Rent Expense and credit Prepaid Rent for $4,350 to reflect the rent expense for six months.

Forrester Company Signed a Two-Year Lease on July 1 and Paid