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:
The right answer is: A debit to the prepaid expense account and a credit to Cash totaling $7,500.
Explanation:
A prepaid expense is recorded as an asset in the Balance Sheet. According to accounting standards, expenses may be recognized on the balance sheet and then expensed in future periods. Usually, an expense is recognized to align with the revenue it relates to, particularly for costs associated with producing goods intended for future sale.
Thus, in Plum Co.'s adjustment entry by December 31st, it is necessary to debit the prepaid expense of $7,500 and credit cash for this amount.
