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1. To journal the transaction involving current rent payment and prepaid rent for future months, it’s important to understand the difference between expenses incurred and prepaid expenses. Let’s break down the scenario and create the appropriate journal entries.

   Scenario Breakdown

   • Current Month Rent (May): $1,500
   • Prepaid Rent: $1,500 per month for the next 2 months (June and July), totaling $3,000

   Journal Entry Components

   The transaction on May 1st involves the following components:

   1. Rent Expense for May: Since rent for May is for the current month, it should be recorded as an expense.
   2. Prepaid Rent (Asset): The rent paid for the subsequent months (June and July) should be considered an asset because it represents a future economic benefit. Prepaid rent is recognized as an asset when paid, and it will be expensed in the months it is actually utilized.

   Journal Entry on May 1st

   Here is how you can fill in the missing journal entry components for the transaction:

   | Date | Account | Debit | Credit |
   |————|——————–|——–|———|
   | May 1st | Rent Expense | $1,500 | |
   | | Prepaid Rent | $3,000 | |
   | | Cash/Bank | | $4,500 |

   Explanation:

   • Rent Expense (Debit $1,500): Represents the rent expense for May, which the business incurs immediately.
   • Prepaid Rent (Debit $3,000): Reflects the rent prepaid for June and July, an asset because it will provide future economic benefits.
   • Cash/Bank (Credit $4,500): Reflects the total cash outflow, combining the current month’s rent and the prepaid rent.

   Future Adjustments for Prepaid Rent

   • At the beginning of each subsequent month (June and July), you will need to adjust the prepaid rent.
   • For each of these months, you will create a journal entry moving $1,500 from “Prepaid Rent” to “Rent Expense.”

   This ensures that expenses are recognized in the period in which they are incurred, following the matching principle in Accounting.

   Adjusting Entry Example:

   For June 1st:

   | Date | Account | Debit | Credit |
   |———-|——————–|——–|———|

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