On July 1of the current calendar year,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.The adjusting entry on December 31 of the current year for Plum would include:
A)A debit to an expense and a credit to a prepaid expense for $5,625.
B)A debit to a prepaid expense and a credit to Cash for $5,625.
C)A debit to an expense and a credit to a prepaid expense for $1,875.
D)A debit to a prepaid expense and a credit to an expense for $1,875.
E)A credit to a liability and a debit to a prepaid expense for $1,875.

Question

Quizplus · Accepted Answer

The adjusting entry recognizes the expense incurred for the period. From July 1 to December 31 is 6 months, which is 1/4 of the two-year period. Therefore, $7,500 * (6/24) = $1,875 should be expensed.

On July 1of the Current Calendar Year,Plum Co