Question

In: Accounting

1) Making rent payments in advance is an example of a(n): A) Accrued revenue. B) Accrued...

1) Making rent payments in advance is an example of a(n):

A) Accrued revenue.

B) Accrued expense.

C) Deferred revenue.

D) Prepaid expense.

2) A company purchased $270,000 in supplies during the year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. For what amount was the adjusting entry to supplies expense?

A) $300,000.

B) $280,000.

C) $260,000.

D) $240,000.

Solutions

Expert Solution

1)

Making rent payments in advance is a Prepaid Expense.

In case of Accounting ,Businesses follow either Cash Basis (or) Accrual Basis of Accounting.

In case of Cash Basis ,company records transactions only when the amount is paid or received whereas in case of Accrual basis ,company records transaction of revenue when it is earned, regardless of when it is received and records expenses transaction when it is incurred,regardless of when they are paid.Usually most of the companies follow Accrual Basis of Accounting.

Answer is Option D) Prepaid Expense as it means,

A prepaid expense is an expenditure paid for in one accounting period, but for which the underlying asset will not be consumed until a future period. When the asset is eventually consumed, it is charged to expense. If consumed over multiple periods, there may be a series of corresponding charges to expense.

A prepaid expense is carried on the balance sheet of an organization as a current asset until it is consumed. The reason for the current asset designation is that most prepaid assets are consumed within a few months of their initial recordation. If a prepaid expense were likely to not be consumed within the next year, it would instead be classified on the balance sheet as a long-term asset .

Option A)

Accrued Revenue which means Accrued Revenue are revenues that are earned in one accounting period, but cash is not received until another accounting period.

Option B)

Accrued Expense which means Accrued expenses are expenses that have been incurred in one accounting period but won't be paid until another accounting period.

Option C)

Deffered Revenue means amount received in advance from the customers for the services to be provided in future.Its an Obligation for the company.

For the better Inderstanding all of this can be related to Single Example

A company providing software services dealing with software license selling for the definite period.

If a company received advance from his customer can be rceorded as Deffered Revenue

If a company provided the service for the period but not received payments has to be recorded as Accrued Revenue.

If a company has received a service from his vendor but not made the payment has to be recorded as Accrued Expense.

If a company made the payment in advance where the service has to be received in future has to be recorded as Prepaid Expense.

In the given Question ,Rent paid in advance is a Prepaid Expense where the service of Leting Space on Rent service still to be received in future.

2)

Supplies in during the year made of $2,70,000

Whereas Supplies Increased of $10,000 during the Year.

So,Final Amount to be Expensed is $2,80,000(adding both Supplies in during the year(270000)and Additional supplies in during the year(10000)).

The correct option is B) $ 2,80,000


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