Question

Part 1 of 3 Assessment 1: When a company purchases prepaid rent... When a company purchases prepaid rent, it points Skipped Multiple Choice eBook will never recognize rent expense. recognizes rent expense immediately. defers recognition of rent expense.

Answer 1

When a company purchases prepaid rent, it defers recognition of rent expense

• Prepaid expenses are expenses that are not incurred yet, but paid in advance. Prepaid rent implies that rent is paid to the landlord in advance. The recognition of rent expense is deferred.
  • E.g. Rent for the month of January paid on December 31: $5,000
  • 
    Credit Debit $5,000 Particulars Prepaid rent To Cash (Being rent for January paid in advance) $5,000
    
• The expense is recorded when the expense is actually incurred.
  • At the end of January, the rent expense is actually incurred.
  • 
    Credit Debit $5,000 Particulars Rent expense To Prepaid rent (Being rent expense for Jan recorded) $5,000
    
• Thus, the first option is incorrect because the rent expense is recorded when it is actually recorded.
• The second option is incorrect because rent expense is not recognized immediately but deferred.