Question

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:

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

Expenses Dr, $1,875 ($7,500 × 6 ÷ 24)

       To Prepaid expenses $1,875

(Being expenses is recorded)

We consider 6 months from July 1 from Dec 31 and we consider 24 months as $7,500 is for 2 years period.

Here we debited the expenses as it increases the expenses and we credited the prepaid expenses as decrease the assets