Question

Kuruvilla, Inc. closes its books at the end of each quarter. It records an adjusting journal entry that debits rent expense and credits prepaid rent. Which of the following statements does not correctly describe the effect on the general ledger of Kuruvilla, Inc.?

Multiple Choice

• The entry increases expenses and decreases stockholders' equity.

• The entry decreases net income and decreases assets.

• The entry decreases net income and decreases liabilities

• The entry increases expenses and decreases current assets.

Answer 1

Rent is usually prepaid for few months. when book are closed the prepaid rent that expires upto the period of closing books is credited and rent expense is debited.

Prepaid rent is current asset as it is prepaid for less than 12 months.

A: The entry increases expenses and decreases stockholders' equity.

Incorrect as prepaid rent credited will not reduce stockholder's equity.

B: The entry decreases net income and decreases assets.

Incorrect

prepaid rent will reduce current assets.

C: The entry decreases net income and decreases liabilities

Incorrect

prepaid rent is not a liability but asset so crediting it will have no effect on liabilitites.

D. The entry increases expenses and decreases current assets.

Correct

Rent expense will reduce net income as it is an expense so it will increase expenses.

Crediting prepaid rent will decrease current assets .

Answer D