Suppose hoosiers, a specialty clothing store, rents space at a local mall for one year, paying $22,800 ($1,900/month) in advance on october 1.1.record the payment of rent in advance on october 1.2.record the adjusting entry for rent used till december 31.3. calculate the year-end adjusted balances of prepaid rent and rent expense (assuming the balance of prepaid rent at the beginning of the year is $0).

1.

                                                        Debit                       Credit

Prepaid Rent                                   $22,800

Cash                                                                                 $22,800              

2.

                                                                  Debit             Credit

Rent expense(22,800*3/12)                    $5,700

Prepaid Rent                                                                   $5,700            

3.

Prepaid rent=22,800-5,700=$17,100

Rent expense=$5,700

Explanation:

1.

On October 1, , the following journal entry will be recorded in respect of the advance rent paid by the Hoosiers for one year of rent space at local mall:

                                                        Debit                       Credit

Prepaid Rent                                   $22,800

Cash                                                                                 $22,800              

2.

The year end given in this question is December 31 and the prepaid rent is  paid for one year and since the rent is paid on October 1,  therefore, only expense in respect of 3 months i.e. from October to the December  will be recognised in this year in respect of rent expense. Remaining expense of nine months will be recognised in the next year.

The following adjusting Journal entry will be recorded in respect of rent expense in accounts on December 31.

                                                                  Debit             Credit

Rent expense(22,800*3/12)                    $5,700

Prepaid Rent                                                                   $5,700            

3. The year end adjusting balance of prepaid rent and rent expense will be calculated as

Prepaid rent=22,800-5,700=$17,100

Rent expense=$5,700

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