On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:

a. A debit to an expense for $5,625.

b. A debit to a prepaid expense for $5,625.

c. A debit to an expense for $1,875.

d. A debit to a prepaid expense for $1,875.

e. A credit to a liability for $1,875.

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8 February, 10:04

On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:

a. A debit to an expense for $5,625.

b. A debit to a prepaid expense for $5,625.

c. A debit to an expense for $1,875.

d. A debit to a prepaid expense for $1,875.

e. A credit to a liability for $1,875.

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Answers (1)

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Zayne Bullock · Answer 1

The answer is C. A debit to an expense for $1,875.

Explanation:

First, we need to know the monthly for the service.

Management service fee is $7,500 and its for 2years (i. e 24months)

So monthly fee to be recorded will be $312.5 ($7,500/24months)

June 30 through December 31 is 6 months.

The expense to be recognized on this day is $1,875 ($312.5 x 6months).

In accounting, debit increases asset and expense while credit decreases it.

Therefore, Apricot will debit the expense account for $1,875.