Suppose Hoosiers, a specialty clothing store, rents space at a local mall for one year, paying $13,800 ($1,150/month) in advance on October 1. Required:
1. Record the adjusting entries on December 31.
2. Record the payment of rent in advance of october 1.
3. Calculate the year-end adjusted balances of prepaid rent and rent expense (assuming the balance of Prepaid Rent at the beginning of the year is $0).

1.

Dec 31    Rent expense                   $3450 Dr

                  Prepaid Rent                       $3450 Cr

2.

Oct 1     Prepaid Rent                        $13800 Dr

                  Cash                                       $13800 Cr

3.

Year end balances at 31 December:

Rent Expense = $3450

Prepaid Rent = $10350

Explanation:

Assumption: The year end for the business in on 31 December.

1.

The rent is paid in advance thus it is an asset. On 31 December the adjusting entry will be made under the accrual principle to match the current period's rent expense and record it in the period to which it belongs to. Thus we will credit the rent expense for 3 months i.e. October, November and December. We will credit the asset account that is Prepaid Rent.

2.

The prepayment of rent is creating an asset account in the title of prepaid rent. The entry would be to record the asset prepaid rent by the full amount of the rent prepaid and credit the other asset account through which the payment is being made.

3.

The adjusted year end balance for rent expense will be the rent expense paid for this period that is $1150 * 3 = 3450

The balance in the prepaid rent account after adjusting the rent expense will be,

Prepaid rent = 13800 - 3450 = $10350