When a company pays $7,200 for two years' rent, it needs to recognize the expense periodically over the rental period rather than all at once. The payment covers 24 months, meaning the monthly rental expense is calculated by dividing the total amount paid by the number of months, resulting in a monthly expense of $300.
To adjust the rent expense for each month, the company would record a monthly rent expense as follows:
Monthly Rent Expense Calculation: $7,200 / 24 months = $300 per month.
Adjusting Entry: Each month, the company will need to recognize $300 as an expense in the rent expense account. Hence, for the first year (12 months), the total would be $3,600, but for the context of a journal entry, acknowledging only one month's payment is relevant.
If, in this scenario, the journal entry is adjusted to recognize that one month has passed, the correct entry to make would be to debit the rent expense account by $300 (assuming the adjustment is for just one month) and credit the prepaid rent account (an asset) to reflect the use of that prepaid expense.
While the correct entry for recognizing the rent expense amount corresponding to one month's worth