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10 September, 04:17

On November 1, Year 1, Thomasson paid rent on its building for 2 years in the amount of $12,000. When the transaction was initially recorded, the full $12,000 was recorded as an expense using an alternative approach to record the prepayment. The adjusting journal entry on December 31, Year 1 requires a

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  1. 10 September, 05:14
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    Credit input of $11,000 to Expense Account to reduce the expense account for year 1 to its right figure of $1,000

    Explanation:

    Step 1: Since the payment was made on November 1st, this means that by 31st December the end of the year 1 period, Thomasson had already paid two months for the present or current period (that is from November 1st to December 31st).

    This means out of the 2 years (24 months) paid, 2 months rent have enjoyed while 22 months remaining will go into prepayments (asset yet to be enjoyed).

    Step 2: Since, all were recorded as rent expense initially, the correction is that only two months worth will be rent expense, while 22 months will go to prepaid rent account.

    2 months rent (2/22) x 12,000 = $1,000

    22 months prepayment (22/22) x 12,000 = $11,000

    Therefore, to reverse the error of debiting the expense account with the entire $12,000, Year 1 expense account will be credited by the prepaid rent of $11,000. This will bring the rent expense for the first year back to its right figure of $1,000
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