Adjusting draft profit for bad debt write-off and prepaid rent

Steps:

• Start with draft profit of $35,000.
• Subtract $1,500 to write off the irrecoverable debt, as the draft overstated profit by treating it as recoverable.
• Add $2,500 to adjust for prepaid rent, as the draft overstated rent expense by not recognizing it as an asset.
• Calculate corrected profit: $35,000 -$1,500 + $2,500 =$36,000.

Why C is correct:

• Under accrual accounting, profit is corrected by recording bad debt expense (reducing profit) and deferring prepaid rent from current expenses (increasing profit), yielding $36,000.

Why the others are wrong:

• A: Adds only the prepaid rent adjustment without subtracting bad debt, overstating profit.
• B: Subtracts bad debt and incorrectly subtracts prepaid rent (treating it as additional expense), understating profit.
• D: Adds both adjustments (bad debt as income, prepaid as expense reduction), overstating profit.

Final answer: C