Question

- On June 30 of the current calendar year, Apricot Co. paid $9,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to expense accounts at the time of cash payment.

Required:

1- Prepare the adjusting entry on December 31 for Apricot Co.

2- Show the effect of the adjusting entry on Income statement and balance sheet at the end of the

    Current calendar year                                             

Answer 1

Requirement 1

At the time of payment  Apricot Co had credited cash and debuted prepaid expenses. This prepaid expense is for 2 years, so at the end of year 1,  Apricot Co can charge expense for that period from prepaid asset account.

Total prepaid = $9,500

Date of prepaid = June 30

Service utilised months in current year = July - Decemeber = 6 months

Expense to be charged for current year = $9,500 x 6months / 24 months = $2,375

Requirement 2

Effect on income statement:- Management expense of $2,375 will be shown.

Effect on balance sheet:- Prepaid expense under currenty assetes will reduce by $2,375. Closing balance will be $7,125