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accrual and prepayment

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FA – FIA FFA › accrual and prepayment

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • September 30, 2021 at 3:06 pm #636763
    caramellatte
    Member
    • Topics: 6
    • Replies: 4
    • ☆

    A company receives rent for subletting part of its office block.
    Rent, receivable quarterly in advance, is received as follows:

    Date of receipt Period covered $
    1 October 20X1 3 months to 31 December 20X1 7,500
    30 December 20X1 3 months to 31 March 20X2 7,500
    4 April 20X2 3 months to 30 June 20X2 9,000
    1 July 20X2 3 months to 30 September 20X2 9,000
    1 October 20X2 3 months to 31 December 20X2 9,000

    What figures, based on these receipts, should appear in the company’s financial statements for the year ended 30 November 20X2?

    Statement of profit or loss Statement of financial position
    A $34,000 Debit Rent in arrears (Dr) $3,000
    B $34,500 Credit Rent received in advance (Cr) $6,000
    C $34,000 Credit Rent received in advance (Cr) $3,000
    D $34,000 Credit Rent in arrears (Dr) $3,000

    Can someone please explain what is the Debit and Credit 34000 means? what does it mean ?

    Statement of profit or loss Statement of financial position
    A $34,000 Debit Rent in arrears (Dr) $3,000
    B $34,500 Credit Rent received in advance (Cr) $6,000
    C $34,000 Credit Rent received in advance (Cr) $3,000
    D $34,000 Credit Rent in arrears (Dr) $3,000

    September 30, 2021 at 3:40 pm #636770
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    The total rental income for the year is (1/3 x 7,500) + 7,500 + 9,000 + 9,000 + (2/3 x 9,000 = $34,000. This will be a credit in the SOPL because it is income.

    As at the 30 November X2, the company has received rent in advance of 1/3 x 9,000 = $3,000.
    This will be a credit balance in the SOFP because it is effectively owed back to the people renting the office and so is a liability.

    The answer is therefore C.

    If you are unsure about debits and credits in general then I suggest that you watch my free lectures. They are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.

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