Question

Assume that on March 1, 2019, a firm prepays rent for a year. The amount of the prepayment is $1,200. If the firm prepares financial statements at the end of the year (December 31, 2019), the effect of the adjusting entry on the accounting equation is

Choose one of answer choices

Increase an asset by $1,200; Decrease stockholders' equity by $1,200

Decrease an asset by $1,000; Decrease stockholders' equity by $1,000

Increase an asset by $1,000; Increase stockholders' equity by $1,000

Decrease an asset by $1,200; Decrease stockholders' equity by $1,200

Answer 1

Here the rent is paid for a year of which 10 months belongs to the current period and 2 months belongs to next period .The entry for rent paid will be

Rent. (Dr). $1200

Cash. (Cr). $1200

And on December 31 the adjusting entry will be

Prepaid rent. (Dr). $200

Rent. (Cr). $200

So the effects on first entry is asset and equity decreased by $1200 as the cash decreases and with increasing the expense the equity will be decreased

And on the second entry the asset gets increased and so the equity as there is new asset created by $200 and the expense gets decreased and so the equity gets increased

So the net effect is $1000 decreased asset and stockholder's equity

So the correct answer is second option

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