Question

On July 1 of the current calendar year, Olive Co. paid $8,700 cash for management services to be performed over a two-year period beginning July 1 Olive follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Olive would include: 8 ore 0 A debit to an expense and a credit to a prepaid expense for $6.525 0 Adebit to an expense and a credit to a prepaid expense for $2.17 O Ad r ed pense and credit to an expense for $2.875 0 A debit to a prepaid expense and a credit to Cash for $6,525 0 Acredit to a liability and a debit to a prepaid expense for $2.175

Answer 1

Answer: A debit to an expense and credit to prepaid expense for $2175.

Reason : Because at the year end we will book the expense incurred for 6 months to p&l account and rest will still be in the prepaid expense account on the assest side untill the same is due in the next year.