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.

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.

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