Llama Company signed a new $36,000 three-year lease beginning October 1, Year 1, for a storage facility for holding merchandise inventory.On October 1, Year 1, Llama Company recorded the first year's payment of $12,000 in the Prepaid Rent account.There was no balance in the Prepaid Rent account prior to this entry.Llama Company records adjustments only at the calendar year end.At December 31, Year 1, the adjusting entry needed to accurately reflect the correct balances in the Prepaid Rent and Rent Expense accounts would be to debit:
A)Prepaid Rent for $12,000 and credit Rent Expense for $12,000
B)Rent Expense for $12,000 and credit Prepaid Rent for $12,000
C)Prepaid Rent for $3,000 and credit Rent Expense for $3,000
D)Rent Expense for $3,000 and credit Prepaid Rent for $3,000
E)Prepaid Rent for $9,000 and credit Rent Expense for $9,000

Question

Quizplus · Accepted Answer

The lease payment covers a year, but only three months (October, November, December) fall within Year 1. Therefore, $12,000 / 12 months * 3 months = $3,000 should be recognized as Rent Expense for Year 1. The adjusting entry debits Rent Expense and credits Prepaid Rent for $3,000, reflecting the expense for the three months of Year 1 and reducing the Prepaid Rent account accordingly.

Llama Company Signed a New $36,000 Three-Year Lease Beginning October