On July 1 of the current calendar year, Olive Co. paid $8700 cash for management services to be performed over a two-year period beginning July 1. Olive follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the current year for Olive would include:
A. A credit to a liability and a debit to a prepaid expense for $2175.
B. A debit to an expense and a credit to a prepaid expense for $6525.
C. A debit to a prepaid expense and a credit to an expense for $2175.
D. A debit to a prepaid expense and a credit to Cash for $6525.
E. A debit to an expense and a credit to a prepaid expense for $2175.
Answer: E
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