I need help with a problem involving adjusting entries. It is involving rent expense and prepaid rent.
Here is the information I am given on the Unadjusted Trial Balance, Dec. 31, 2005:
Prepaid studio rent: 2,500
Studio rent expense: 11,250
The data says, "The studio pays rent quarterly (every 3 months). The last payment was made November 1, 2005. The next payment will be made early in February 2006."
I know I have to put a debit towards the rent expense and a debit towards prepaid studio rent - but I'm not sure what values to put and what explanation I should put for it.
Thanks! :)
To solve this problem involving adjusting entries for rent expense and prepaid rent, we need to consider the timing of the payments and the time period covered by each payment.
First, determine the time period covered by each rental payment. In this case, the last payment was made on November 1, 2005, and the next payment will be made in February 2006. This means that the payment made on November 1, 2005, covers rent for the months of November, December, and January. The payment made in February 2006 will cover rent for the months of February, March, and April.
Now, let's calculate the amount of rent expense that should be recorded for the year-end adjusting entry.
1. Calculate the number of months between the last payment (November 1) and the year-end (December 31): 2 months (November and December).
2. Calculate the monthly rent expense by dividing the annual rent expense by 12: $11,250 / 12 = $937.50 (rounded).
3. Multiply the monthly rent expense by the number of months (2) to get the rent expense for November and December: $937.50 * 2 = $1,875.
Next, determine the amount of prepaid rent that should be recorded for the year-end adjusting entry.
1. Determine the number of months covered by the next payment (February 2006): 3 months (February, March, and April).
2. Calculate the monthly prepaid rent by dividing the prepaid studio rent by the number of months covered by each payment: $2,500 / 3 = $833.33 (rounded).
3. Multiply the monthly prepaid rent by the number of months (3) to get the prepaid rent amount for February, March, and April: $833.33 * 3 = $2,500.
To make the adjusting entries:
1. Debit Rent Expense for $1,875. This will increase the expense for the months of November and December.
2. Debit Prepaid Studio Rent for $2,500. This will reduce the prepaid amount, accounting for the next three months (February, March, and April).
3. Credit Prepaid Studio Rent for $1,875. This will recognize the prepaid amount that has been used (for November and December).
4. Credit Rent Expense for $2,500. This will reverse the expense recognized in advance for the months of February, March, and April.
The explanations for these adjusting entries could be:
- Debit Rent Expense: "To recognize the rent expense for the months of November and December."
- Debit Prepaid Studio Rent: "To adjust the prepaid rent amount for the next payment covering the months of February, March, and April."
- Credit Prepaid Studio Rent: "To recognize the portion of prepaid rent that has been used for the months of November and December."
- Credit Rent Expense: "To reverse the previously recognized expense amount for the months of February, March, and April."
Remember to consult with an accounting professional or refer to your specific accounting guidelines to ensure accuracy and compliance with your accounting principles.