Selcomm Communications received cash of $12,000 on October 1, 2015 as prepayment for 12 months’ rent....

Selcomm Communications received cash of $12,000 on October 1, 2015 as prepayment for 12 months’ rent. The accountant recorded the cash receipt as a credit to Rent Revenue and a debit to Cash. What is the year-end adjusting entry on December 31?

options:

a debit to Rent Revenue and a credit to Unearned Rent, $3,000

a debit to Rent Revenue and a credit to Unearned Rent, $9,000

a debit to Unearned Rent and a credit to Rent Revenue, $3,000

a debit to Cash and a credit to Unearned Rent, $9,000

Expert Solution

Answer

As per accrual accounting concept read with matching concept, expense and income should be recorded in the period they are expensed or received(or accrued) respectively even if they are received or not in cash.
Income and expenses that are recorded should belong to that accounting period.
In the given case, a cash receipt of $12000 is received for 12 months on 1^st Oct.
Year ends on 31 December, hence income/revenues should be recognised of 3 months only, beginning from Oct.
The accountant however, recorded whole $12000 as an Income as Rent revenue. Hence, an adjusting entry is required on 31 dec.
Since, the revenues that should be recognised will be $3000 [ie for 3 months only], the excess revenue recognised of $9000 will need to be debited.
Now, Rent revenue a/c that has been credited in excess by $9000 on Oct 1, will be debited by $9000 on 31 Dec.
Accordingly, since the 9 month excess rent of $9000 is received, but not earned in this period will be treated as UNEARNED RENT.
Hence, Answer is OPTION-B, adjusting entry will e a DEBIT to Rent revenue and CREDIT to Unearned Rent by $9000

Account Titles and Explanation	Debit	Credit
Rent Revenue	$9000
Unearned Rent		$9000

ekkarill92 answered 3 years ago

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