If rent for the next six months is prepaid for $6,000, what adjusting entry is made at month end after two months?

If rent for the next six months is prepaid for $6,000, what adjusting entry is made at month end after two months?

• A. Debit Rent Expense 2,000; Credit Prepaid Rent 2,000.
• B. Debit Prepaid Rent 2,000; Credit Rent Expense 2,000.
• C. Debit Rent Expense 4,000; Credit Prepaid Rent 4,000.
• D. Debit Prepaid Rent 6,000; Credit Rent Expense 6,000.

Answer: (A)

Prepaid rent is an asset representing payments made in advance for future periods. As time passes, part of that asset is used up and becomes an expense. Since the six-month prepaid amount is $6,000, it costs $1,000 per month. After two months, $2,000 of the prepaid rent has expired, so you recognize that cost by transferring it from the asset to the expense. The adjusting entry is to Debit Rent Expense for 2,000 and Credit Prepaid Rent for 2,000. This matches the expense to the period in which the benefit was received and reduces the asset accordingly. This is the correct action because it moves the cost from the asset account to the expense account as the benefit is consumed. The other options either increase the asset, record too large an expense, or reverse the original setup, which doesn't reflect the passage of time and use of the prepaid amount.

Prepaid rent is an asset representing payments made in advance for future periods. As time passes, part of that asset is used up and becomes an expense. Since the six-month prepaid amount is $6,000, it costs $1,000 per month. After two months, $2,000 of the prepaid rent has expired, so you recognize that cost by transferring it from the asset to the expense.

The adjusting entry is to Debit Rent Expense for 2,000 and Credit Prepaid Rent for 2,000. This matches the expense to the period in which the benefit was received and reduces the asset accordingly.

This is the correct action because it moves the cost from the asset account to the expense account as the benefit is consumed. The other options either increase the asset, record too large an expense, or reverse the original setup, which doesn't reflect the passage of time and use of the prepaid amount.