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

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When Plum Co. paid $7,500 cash for management services to be performed over a two-year period, it created a prepaid expense. According to the policy of Plum Co., prepaid expenses are recorded as an asset account. Therefore, on July 1, Plum Co. should record a debit to a prepaid expense (an asset account) and a credit to Cash (a liability account) for $7,500. The correct choice is E.