In January, a company paid rental fees of $30,000 for February. Which of the following journal entries should be recorded in January and February?
In January: Retained Earnings (OE) (rent expense) (dec) 30,000
…Cash (A) (dec) 30,000
In January: Prepaid Rent (A) (inc) 30,000
…Cash (A) (dec) 30,000
In February: Retained Earnings (OE) (rent expense) (dec) 30,000
…Prepaid Rent (A) (dec) 30,000
In January: Retained Earnings (OE) (rent expense) (dec) 30,000
…Prepaid Rent (A) (dec) 30,000
In February: Prepaid Rent (A) (inc) 30,000
…Cash (A) (dec) 30,000
In February: Retained Earnings (OE) (rent expense) (dec) 30,000
…Cash (A) (dec) 30,000
Correct answer. The company made a cash payment in January, so it must record a decrease in Cash during that month. However, according to the matching principle, expenses are recognized in the period in which related revenue is recognized. The rental fees for February make the company’s operation and sales in February possible; therefore, the rent expense should be recognized in February. As such, the company records an increase in Prepaid Rent at the time it makes the payment and will decrease that account in February when rent expense is recorded.
