California Mining began operations by issuing common stock for $92,500. The comp

Question

California Mining began operations by issuing common stock for $92,500. The company paid $83,250 cash in advance for a one-year contract to lease machinery for the business. The lease agreement was signed on March 1, 2011, and was effective immediately. California Mining received $106,375 of cash revenue in 2011.

Record in general journal format the adjustment required as of December 31, 2011.

12/31: rent expense
prepaid rent (lease)

I don't know how to figure out the rent expense or the prepaid rent. The first question was prepaid rent and cash about March 1 so they were both $83,250. I don't know the answer to Dec. 31 though and I feel like I've put in every number possible to try to get the solution.

Explanation / Answer

Here's how yo figure the prepaid rent: So they paid 83,250 for one year which is 12 months. Each month rent is 6,937.50 (83,250/12) Rent expenses incurred was from March 1st - til Dec 31st (which would be 10 mos) The prepaid rent portion is the period from Jan 1st til Feb 28 ( which is 2 mos) So if you look at the scenario, your rent expense would only be 69,375(6937.50 x 10 mos) The entry: Rent Exp dr Prepaid Rent Cr You need to credit prepaid rent because originally you have 12 mos worth when you recorded it on Mar 1st, but come dec 31st, you already incurred those expenses...therefore you realized those rent expenses for the 10 month period by adjusting the prepaid rent account as well as debiting the rent expense account. Hope this helps

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