Question

In: Accounting

On april 1, 2016 SBD corp paid $120000 for rent on warehouse space one year in...

On april 1, 2016 SBD corp paid $120000 for rent on warehouse space one year in advance. On october 1 2016 SBD corp entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for SBD to receive $8000 per month from the lessee, due and payable at the end of the 4 month lease term. At december 31 2016 none of the rental payments from the lessee had yet been received.

1) if SBD makes the appropirate adjusting entry how much will be reported on the december 31 2016 income statement for rent expense

2) If SBD makes the appropriate adjusting entry how much will be reported on the december 31 2016 balance ssheet as prepaid rent and rent receivable respectively

Solutions

Expert Solution

1) If SBD amkes the appropriate adjusting entry how much will be reported on the december 31 2016 income statement for rent expense?

Answer: As we have paid $1,20,000 for the whole year in advance on April 1, 2016 and as at december 31, 2016 we have used only 9 months of the advance rental. So the rent for 9 months should only be the expense for the year. That is the monthly rental of $10,000 ($1,20,000 / 12) for 9 months working out for $90,000.

So adjustment entry will be debiting rent expense for $90,000 and crediting prepaid rent for $90,000 and another adjustment entry for rent receivable for three months for old warehouse given for rent will be debiting rent receivable $24,000 and crediting rent income for $24,000.

So, the rent expense that will be reported on the december 31, 2016 is $90,000.

2) If SBD makes the appropriate adjusting entry how much will be reported on the december 31, 2016 balance sheet as prepaid rent and rent receivable respectively?

Answer: After making all the above adjusting entries prepaid rent will be $30,000 for 3 months rent and rent receivable will be $24,000 for 3 months rent income accrued in the assets side of the balance sheet.


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