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Hi i came across the following question in my exam kit
leddley owns two properties which it rents to tenants. In the year ended 31 december 20X6
it received $280,000 in respect of property 1 and $160,000 in respect of property 2. balances on the accrued income and prepaid expenses accounts were as follows31st dec 20×6 31st december 20×5
property 1 13,400 DR 12,300 Cr
Property 2 6,700 Cr 5,400 DrWhat amount should be credited to the statement of profit or loss for the year ended 31st december 20×6
A $453,600
B $440,200
C $ 465,900
D $ 475,600The answer i got was B $440,200 but the exam kit states it is A 453,600
Thank you
The exam kit answer is correct.
The total cash received during the year was 440,000.
At the start of the year, property 1 had already paid us 12300 for this year, so this needs adding. Also, property 2 was owing to us for last yea 5400, so this needs subtracting.
At the end of the year, property 1 was still owing us money for this year of 13,400, so this needs adding. Property 2 had overpaid us 6,700 for this year, and so this needs subtracting.
So…the total income for this year is 440,000 + 12,300 – 5,400 + 13,400 – 6,700 = 453,600
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please keep this open because i may want to ask another question.
So in regards to above:prepaid income =Liability =Credit
prepaid expense = Asset =Debit
accrued income = Asset = Debit
acccued expense =Liability =Creditthis is dealing with the 2 accounts prepaid expense and accrued income so the opening balances are Debit prepaid expense and Credit accrued income?
The opening Credit balance will never mean a prepaid expense decreasing?
please bear with me on this as im quite confused
What you write is correct, and no – an opening credit balance cannot mean a prepaid expense decreasing.
A debit balance represents an asset (so accrued income or prepaid expense).
A credit balance represents a liability (so prepaid income or accrued expense).Don’t get too worked up over debits and credits – there is very little debits and credits needed in the exam. If you look at the way I answered your earlier question (without using debits and credits) it is easier and quicker than drawing t-accounts.
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i believe what is confusing me here is they state 2 asset accounts “accrued income” and “prepaid expense” and theres a credit balance so why is this not in a liability account instead i.e. 12300 prepaid income?
Now you are confusing me.
What you wrote in your previous posting was “accrued income = asset = debit” and that
“prepaid expense = asset = debit”.
That is correct.I do not know who is saying that the two asset accounts have credit balances – if they are saying that then they are wrong (unless the question is asking you to correct a mistake).
Have you watched the free lecture on accruals and prepayments?
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balances on the accrued income and prepaid expenses accounts were as follows
31st dec 20×6 31st december 20×5
property 1 13,400DR 12,300Cr
Property 2 6,700 Cr 5,400 Drthe 12300 is a credit but the two accounts are accrued income and prepaid expense= Asset acccounts.
your previous answer says:
“a credit balance represents a liability (so prepaid income or accrued expense)”.but the question doesnt mention these accountsim probably doing something very wrong!
The question doesn’t need to mention the names of the accounts.
For property 1, it means that at the start of the year there was 13,400 owing by renters (so accrued income) and 12,300 owing to renters (so prepaid income).
Presumably there are lots of different people renting and so some have overpaid at the start of the year, and some are still owing rent to us at the start of the year.Similarly for property 2.
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thank you!
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