On 1 May Handy Tools paid $12,000 to Really Good Real Estate for 6 month’s rent beginning 1 May. Prepaid Rent was debited for the full amount. If financial statements are prepared on 31 May, the adjusting entry to be made by Handy Tools is:
Debit Prepaid rent, $1,000; Credit Rent expense, $1,000.
Debit Rent expense, $6,000; Credit Prepaid rent, $6,000.
Debit Rent expense, $500; Credit Prepaid rent, $500.
Debit Prepaid rent, $2,000; Credit Prepaid rent, $2,000.
Correct!
Debit Rent expense, $2,000; Credit Prepaid rent, $2,000.
The adjusting entry to be made by Handy Tools as of 31 May would be:
Debit Rent expense, $1,000; Credit Prepaid rent, $1,000.
This entry is made to recognize the portion of the prepaid rent that has been consumed during May, which is one-twelfth (1/6) of the total $12,000 paid for the 6-month rent period starting 1 May. The debit to Rent expense reflects the expense incurred for the month, while the credit to Prepaid Rent reduces the asset account as the benefit from the prepayment has been used up for that period.
