161.On July 1 of the current calendar year,Olive Co.paid $7,500 cash for management services to be performed over a two-year period beginning July 1.Olive 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 Olive 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 total payment of $7,500 covers a two-year period, so the annual cost is $3,750. From July 1 to December 31 is six months, half of a year, so the expense for the current year is half of the annual cost: $3,750 / 2 = $1,875. Therefore, the adjusting entry should recognize $1,875 of the prepaid amount as an expense for the current year.

161On July 1 of the Current Calendar Year,Olive Co