7-4 On June 20, 2021, Amy Smith, owner of Amy’s Floral Shop, Inc., signed a contract to rent a retail store. As part of the contract, Amy paid four months of rent in advance. The rental rate is $3,000...

7-4

On June 20, 2021, Amy Smith, owner of Amy’s Floral Shop, Inc., signed a contract to rent a retail

store. As part of the contract, Amy paid four months of rent in advance. The rental rate is $3,000

per month, thus she paid $12,000 cash in advance when she signed the contract on June 20. Amy

will move into the retail store on July 1, 2021, which is the start of her rental period.

The company has the accounting policy that all prepaid assets are initially recorded in asset

accounts.

The following is a partial list of the accounts in Amy’s General Ledger. These are the only

accounts you need for this problem.

 Cash

 Prepaid Rent (asset account)
 Rent Expense

Requirement 1

Prepare the General Journal entry to record the $12,000 payment made when the rental

contract was signed on June 20, 2021.

Requirement 2

Fill-in the amounts on the Prepaid Rent timeline. The boxes above the timeline show the

amount of Prepaid Rent still remaining at various dates during the four month period. The

boxes below the timeline show the amount of Prepaid Rent that expires (is used-up) during

each of the four months. Hint: The amount that expires will be the same each month.
Requirement 3

Prepare a “T” account analysis to determine the required July 31 adjustment to the Prepaid

Rent account.

Requirement 4

Prepare the July 31 General Journal adjusting entry for Prepaid Rent.

Requirement 5

Assuming that all monthly General Journal adjusting entries were correctly made:

 What would be the amount of Prepaid Rent shown on Amy’s Floral Shop, Inc.’s Balance

Sheet as of August 31, 2021?

 What would be the amount of Rent Expense on the Income Statement for the period

August 1 to August 31, 2021?