Accounting treatment record after canceling a prepaid service contract and receiving a full refund
The treasurer of a small nonprofit organization faces an accounting adjustment challenge due to the cancellation of a prepaid service contract: originally prepaid $335, with $65 amortized, leaving a balance of $270; the supplier issued a $335 credit memo, of which $272 was used for a new service contract, and the remaining $63 was kept for future purchases. The treasurer seeks help in preparing adjusting entries to keep the prepaid account balanced.
I am the treasurer of a small nonprofit organization. I apologize, but for the following situation, I really cannot figure out the adjusting entries. We do not use an accounts payable account—all purchases are paid in cash. Seven months ago, we paid a set of invoices for services to be provided over the next three years. One of the invoices was for $335. At the time of payment, the amount was recorded in a prepaid expense account. Over seven months, we amortized $65 against this invoice, leaving a prepaid balance of $270. Our supplier wants to cancel the original invoice and replace it with a service contract that is more financially favorable to us. Therefore, they issued us a credit memo for in-store use, not for the unused portion, but for the full $335! Then, they applied $272 of that credit toward a new service contract, leaving us with $63 for future purchases.
If they had only refunded the unused balance of $270, my entry would be simple. But that is not the case, and I am stuck. I need to keep the prepaid account in balance, but I do not know how to make the adjusting entry.
I came out of retirement after 15 years to help this young small nonprofit, and I am afraid my skills are a bit rusty. Any help would be greatly appreciated (and I have a feeling that once I post this question, I will have an epiphany, and it will be one of those "Oh, that's it!" moments).
Thank you.