The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:

-Jason Company paid $7,200 for one year's rent in advance beginning on October 1,2015.Jason's 2015 income statement would report rent expense,and its statement of cash flows would report cash outflow for rent,respectively,of
A)$7,200;$7,200
B)$1,800;$1,800
C)$1,800;$7,200
D)$1,200;$7,200

Question

The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:
 
-Jason Company paid $7,200 for one year's rent in advance beginning on October 1,2015.Jason's 2015 income statement would report rent expense,and its statement of cash flows would report cash outflow for rent,respectively,of
A)$7,200;$7,200 
B)$1,800;$1,800 
C)$1,800;$7,200 
D)$1,200;$7,200

Quizplus · Accepted Answer

Since the rent was paid in advance for one year beginning on October 1, 2015, only three months of rent expense would be recognized in the 2015 income statement, which is $1,800 ($7,200 divided by 12 months multiplied by 3 months). The full amount of $7,200 would be reported as a cash outflow for rent in the 2015 statement of cash flows.

The Year-End Adjustment to Recognize One Month's Work on the Three-Month