Prepaid Rent Adjustment at Year-End

Steps:

• Payment of $8,000 on 1 December 2019 covers 4 months (Dec 2019–Mar 2020), so$2,000 per month.
• By 31 December 2019, 1 month (December) is expensed, leaving $6,000 as prepaid rent for Jan–Mar 2020.
• Prepaid rent is recorded as a debit balance in the asset account.
• On 1 January 2020, this $6,000 debit carries forward as the opening balance.

Why D is correct:

• Under accrual accounting (matching principle), prepaid expenses are deferred assets with debit balances until expensed.

Why the others are wrong:

• A: Credit balance would imply accrued liability, not prepaid asset.
• B: $2,000 debit reflects only December's expense, ignoring the prepaid portion.
• C: $6,000 credit reverses the asset nature of unexpired rent.

Final answer: D