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A business prepays $1,200 for a 12-month business licence on 1 June and records it as Prepaid Taxes. What is the 30 June adjusting entry?
ADebit Prepaid Taxes $100; credit Taxes Expense $100
BDebit Taxes Payable $100; credit Taxes Expense $100
CDebit Taxes Expense $100; credit Prepaid Taxes $100
DDebit Taxes Expense $1,100; credit Prepaid Taxes $1,100
Answer & Solution
Correct answer: C. Debit Taxes Expense $100; credit Prepaid Taxes $100
1. One month of the licence has expired: $1{,}200 \div 12 = 100$.
2. The expense increases (debit Taxes Expense $\$100$); the prepaid asset decreases (credit Prepaid Taxes $\$100$).
3. So C is correct.
4. B introduces a payable (this is a deferral, not an accrual); A reverses the entry; D uses the $\$1{,}100$ unexpired amount.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.3.1 "Business License Tax—Deferred Expense", p.69_
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