Provide an example of a deferral and its adjusting entry.

• A. Debit Prepaid Rent 1,000; Credit Rent Expense 1,000.
• B. Debit Rent Revenue 1,000; Credit Prepaid Rent 1,000.
• C. Debit Rent Expense 1,000; Credit Prepaid Rent 1,000.
• D. Debit Prepaid Insurance 1,000; Credit Insurance Revenue 1,000.

Answer: (C)

Deferrals involve recording a payment as an asset and then recognizing the related expense as time passes. When rent is paid in advance, it sits in Prepaid Rent (an asset). At the end of the period, the portion that has expired is moved from the asset to an expense to reflect that the cost has been incurred. The adjusting entry would debit Rent Expense and credit Prepaid Rent for the amount used, here 1,000. This shows the company has incurred the rent cost for the period and reduces the prepaid asset accordingly.

Other options either increase the asset or misclassify the transaction as revenue or apply to a different prepaid item, which does not reflect the consumption of the prepaid rent.