Stancil Enterprises prepaid four months of office rent totaling $8,100 on October 1,2017.Assuming Stancil records deferred expenses using the alternative treatment,what would be the adjusting entry recorded on December 31,2017?

Question

Quizplus · Accepted Answer

Assuming that Stancil uses the alternative treatment, it means that the prepaid rent is initially recorded as an asset and then adjusted to an expense account as time passes. Since four months have passed since the rent payment was made on October 1, 2017, two months' worth of rent expense needs to be recognized in the adjusting entry.

To adjust the prepaid rent account, the company should debit Prepaid Rent (an asset account) and credit Rent Expense (an expense account) for the portion of rent that has been used up during the period.

The calculation to determine the amount for the adjusting entry is: 
Prepaid rent ÷ number of months paid for = monthly rent expense 
$8,100 ÷ 4 months = $2,025/month

Therefore, the adjusting entry on December 31, 2017 is:
Debit Prepaid Rent for $4,050 ($2,025 x 2 months)
Credit Rent Expense for $4,050 ($2,025 x 2 months)

Stancil Enterprises Prepaid Four Months of Office Rent Totaling $8,100