Question

Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:

1. A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.
2. The company's pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay. Employees earn a total of $12,800 per week.
3. On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.
4. Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.
5. All fees totaling $19,800 were earned during the month for clients who had paid in advance.

What should be the balance of the Prepaid Rent?

a. $0
b. $7,000
c. $14,000
d. $21,000

Answer 1

Answer; c. $14,000

Explanation

On December 1, rent had been paid for 3 months. At a rate of $7,000 a month this will come to;

= 7,000 * 3

= $21,000

The Prepaid rent account will reduce every month by the rent due for that month. The balance on the Prepaid account as at December 31 will therefore have reduced by one month from December 1.

= 21,000 - 7,000

= $14,000