A new company signed a lease for office space during their first month of business. At that time they paid a total of $12,000 for first and last months' rent. At the end of the first month, the effect on the financial statements would be
A) $12,000 rent expense.
B) $6,000 rent expense and $6,000 prepaid rent on the Statement of Financial Position.
C) $12,000 prepaid rent on the Statement of Financial Position.
D) Nothing recorded because the company has not made any sales yet.

Question

Quizplus · Accepted Answer

When a company pays rent in advance, it is initially recorded as a prepaid expense on the Statement of Financial Position (balance sheet). When the month is complete, half of the prepaid rent will have been consumed, resulting in a rent expense of $6,000 on the income statement and a remaining prepaid rent balance of $6,000 on the Statement of Financial Position. Therefore, the correct answer is B. Choice A is incorrect because the expense is only half of the prepaid rent at this point in time. Choice C is incorrect because the prepaid rent balance is $6,000. Choice D is incorrect because the rent payment is an expense transaction, not a sales transaction.

A New Company Signed a Lease for Office Space During