On July 1 of the current calendar year, Plum Co. paid $7,500 cash for management services to be performed over a two-year period beginning July 1. 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 credit to a liability and a debit to a prepaid expense for $1,875.
B) A debit to an expense and a credit to a prepaid expense for $1,875.
C) A debit to a prepaid expense and a credit to an expense for $1,875.
D) A debit to an expense and a credit to a prepaid expense for $5,625.
E) A debit to a prepaid expense and a credit to Cash for $5,625.

Question

Quizplus · Accepted Answer

The adjusting entry recognizes the expense incurred for the period. Since $7,500 covers two years, the expense for six months (July 1 to December 31) is $1,875. Thus, debit the expense and credit the prepaid expense for $1,875.

On July 1 of the Current Calendar Year, Plum Co