On July 1 Plum Co.paid $7,500 cash for management services to be performed over a two-year period.Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.On July 1 Plum should record:

Question

Quizplus · Accepted Answer

Plum paid $7,500 for management services to be performed over a two-year period, which means that the expense has not yet been incurred. According to the policy of recording prepaid expenses, Plum should record the transaction as a debit to a prepaid expense (an asset account) and a credit to Cash for $7,500. This reflects the fact that Plum has acquired a future economic benefit (the management services) which will be used over the two-year period. Therefore, choice (C) is the best answer.