Question

1. Prepare AJEs that should be made on 12-31-15, the end of the accounting year, for each of the following situations. If no AJE is required, indicate “none.” Assume the company only makes AJEs at the end of the accounting year. In addition, identify the impact, if any, on the financial statements if you failed to make the appropriate AJE.  Indicate NE for no impact, U for understatement, and O for overstatement. Use the following format to indicate the impact of failing to make the required entry for each situation.

Assets                        Liabilities Expenses                   Revenues                                    Net Income              Owners’ Equity

XX                               XX                               XX                               XX                               XX                               XX                               

1. On June 1, 2015, the company rented a machine for 6 months and paid $30,000 in advance. The journal entry to record the payment included a debit to a permanent account.

2. On March 31, 2015, the company collected $12,000 of rent for 6 months in advance. The journal entry to record the receipt included a credit to a temporary account.

3. On September 30, 2015, the company collected $36,000 as rent for 6 months in advance. The journal entry to record the receipt included a credit to a permanent account.

4. On June 30, 2015, the company rented equipment for 12 months and paid $24,000 in advance. The journal entry to record the payment included a debit to a temporary account.

Answer 1

The correct entry in the each of the above given situation is as below:

1. Rent Expense A/c             (Expense)             Debit      30000

Bank A/c                                                             Credit    30000

Reason being the entire rent paid in advance accrues in current financial year only i.e. 30-11-15.(In other word no AJE required)             

1. Bank A/c                                                             Debit      30000

Rent Income A/c               (Income)               Credit    30000

Reason being the entire rent received in advance accrues in current financial year only i.e. on 30-09-15. (In other word no AJE required)

1. Bank A/c                                                                                             Debit      36000

Rent Income A/c                                               (Income)               Credit    18000

Rent Received in Advance A/c                    (Liability)             Credit    18000

Reason being the rent received in advance accrues in current financial year and next financial year equally (3 months each i.e. 18000). Hence, above AJE required would require.

1. Rent Expense A/c                             (Expense)             Debit      12000

Rent Paid in Advance A/c             (Asset)                   Debit      12000

Bank A/c                                                                             Credit    24000

Reason being the rent paid in advance accrues in current financial year and next financial year equally (6 months each i.e. 12000). Hence, above AJE required would require.