- This topic has 11 replies, 5 voices, and was last updated 3 years ago by
.
- Posts
A company pays rent quarterly in arrears on 1 Jan,1 April,1 July, 1oct each year.The rent increased from $90000 per year to $12000 per year as from 1 October 2002.what rent expense and accrual should be included in the company’s financial statements for the yr ended 31,Jan 2003
From 1 Feb to 30 Sep is 8 months and so the expense is 8/12 x 90,000 = 60,000
From 1 Oct to 31 Jan is 4 months and so the expense is 4/12 x 120000 = 40,000
So the total expense is 100,000The last payment was on 1 jan and so at 31 Jan they owe one months rent. So the accrual is 1/12 x 120,000 = 10,000
Hey john ,
Could you explain me this question.A limited liability company, receives rent for subletting part of its office premises to a number of tenants.
In the year ended 31 December 20X4 B received cash of $318,600 from its tenants. Details of rent in advance and in arrears at the beginning and end of 20X4 are as follows:
31 December 20X4 20X3
$ $ Rent received in advance 28,400 24,600
Rent owing by tenants 18,300 16,900
All rent owing was subsequently received
What figure for rental income should be included in the statement of profit or loss of B for 20X4?The cash received of 318600 includes rent that was owing from last year of 19600. The 19600 is last years income and so needs removing from the cash received. It does not include rent already received in advance last year of 24600 – that is this years income and so needs adding.
At the end of the year, they had received 28400 in advance – it is included in the cash but is not this years income (it is next years) and so needs removing. At the end of this year they are owed 18300. It is this years income but they have not yet had the cash and so it needs adding.
So the total income earned for this year is 318600 – 19600 + 24600 – 28400 + 18300.
Thanks john I should practice more of these type of questions. I could not understand question as u did .
John,
Since the question has already been asked, I didn’t want to start a new topic. (I’m referring to BPP revision kit Q10.2, first question asked on this thread).
I understand the logic behind the answer, but what I am getting hung up on is what I think is “double counting” for lack of a better phrase.
So we calculate the actual expense for the year till 31 Jan 20X3, which includes the month of Jan which we pay in April. So the expense is 100,000 with that payment, but we also account for the accrual of 10,000 because we hadn’t paid for the month of Jan by year end. Wouldn’t that be overstating the expenses by 10,000 since we already account for the Jan payment when we calculate the year’s worth of rent? In other words, why wouldn’t expenses be $90,000 + accrual of $10,000I hope my question makes sense. Maybe I’ve been doing problems for a little too long and overthinking, thus confusing myself, but could you explain it to me?
Your help is as always much appreciated.
Rachel
Hi Mr. John. Please help me with this question as the answer in the revision kit just confused me.
A company has occupied rented premises for some years, paying an annual rent of $120000. From 1 April 20X6 the rent was increased to $144000 per year. Rent is paid quarterly in advance on 1 January, 1 April, 1 July and 1 October each year.
What figures should appear for rent in the company’s financial statements for the year ended 30 November 20X6?
Thank you.
Rachel: The total expense – the cost of the rent for the year is $100,000.
However, $10,000 of this amount had not actually been paid as at the 31 January. It is included as an expense because they had been using the premises, but separately it has to be shown as being owing at the end of the year on the SOFP. (If it had been paid before the end of the year it would not change the expense, but on the SOFP there we be nothing shown as owing but the cash would be 10,000 lower instead).
Sabrina:
We need the expense for the period 1 December 20X5 to 30 November 20X6.
For the period 1 Dec X5 to 1 April X6 (4 months) the rent was at the rate of $120,000 per year and so the cost for that period is 4/12 x 120,000 = $40,000.
For the period 1 Apr X6 to 30 Nov X6 (8 months) the rent was at the rate of $144,000 per year and so the cost of this period is 8/12 x 144,000 = $96,000.
So the total expense for the year is 40,000 + 96,000 = $136,000 in the SOPL.
As at the 30 Nov X6, the most recent payment will have been on 1 Oct X6 and this will have been for Oct, Nov, and Dec. That means that they have paid for December in advance and therefore there is a pre-payment of 1/12 x $144,000 = $12,000 to appear in the SOFP.
- The topic ‘Accruals and prepayments’ is closed to new replies.