A company paid for 12 months of internet services for $800 on October 1. They recorded the transaction by debiting Prepaid Internet Service and crediting cash. Which of the following adjusting journal entries, recorded on December 31, is correct?

A. Debit internet expense $200 and credit prepaid internet service $200.

B. Debit prepaid internet service $200 and credit internet expense $200.

C. Debit prepaid internet service $600 and credit internet expense $600

D. Debit internet expense $200 and credit cash $200.

E. None of the above.

A. Debit internet expense $200 and credit prepaid internet service $200.      

Explanation:

On December 31 total expense of 3 months has been accrued and it should be recorded on the period end as per accrual basis and the balance should be transferred from prepaid internet service account to internet service expense account.

Accrued Internet Expense for the period = (800/12) x 3 = $200

Internet Expense should be debited by $200 in respect to the internet expense accrued during the period and prepaid internet service account should be credited to transfer the balance.

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