On June 30, 2007, 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 a time of
cash payment. The adjusting entry on December 31, 2007 for Apricot would include:

Question

BlackTom AI · Accepted Answer

The problem involves adjusting entries for prepaid expenses. Apricot Co. paid $7,500 for management services to be performed over two years. This payment is initially recorded as a prepaid expense, an asset, because the services have not yet been consumed.

The key is to determine how much of this prepaid expense should be recognized as an expense by December 31, 2007. The total period covered by the prepaid expense is two years, or 24 months. By December 31, 2007, six months have passed since the payment on June 30, 2007.

To calculate the monthly expense, divide the total prepaid amount by the number of months: $7,500 / 24 months = $312.50 per month. Over six months, the expense recognized should be 6 months * $312.50/month = $1,875.

The adjusting entry on December 31, 2007, should recognize this portion of the prepaid expense as an actual expense. Therefore, the correct entry would be a debit to the expense account (Management Services Expense) for $1,875, reducing the prepaid expense asset account.

Comparatively, the other options fail because:
- 'A credit to a liability for $1,875' is incorrect because prepaid expenses are initially recorded as assets, not liabilities.
- 'A debit to expense for $5,635' is incorrect because it does not correspond to the correct amount of expense incurred over six months.
- 'A debit to a prepaid expense for $1,875' is incorrect because the prepaid expense account should be credited, not debited, to reflect the reduction in the asset.
- 'A debit to a prepaid expense for $5,635' is incorrect for the same reason as above and also because the amount is incorrect.

Thus, the correct option is 'a debit to an expense for $1,875'.

On June 30, 2007, 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 a time of cash payment. The adjusting entry on December 31, 2007 for Apricot would include:Single choice

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