On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:
A) A debit to an expense for $5,625.
B) A debit to a prepaid expense for $5,625.
C) A debit to an expense for $1,875.
D) A debit to a prepaid expense for $1,875.
E) A credit to a liability for $1,875.

Question

Quizplus · Accepted Answer

The total cost of the management services is $7,500 for a two-year period, which equals $3,750 per year. Since the services were paid for on June 30 and the adjustment is being made on December 31, only 6 months of the service has been used. Therefore, the expense for 6 months is $3,750 / 2 = $1,875. This amount should be recognized as an expense for the current period, hence a debit to an expense account.

On June 30 of the Current Calendar Year, Apricot Co