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Q: Leddley owns two properties which it rents to tenants. In the year ended 31 December 2006, it received $280,000 in respect of property 1 and $160,000 in respect of property 2. Balances on the accrued income and prepaid expense accounts were as follows:
—————————31 December 2006——31 December 2005
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 31 December 2006 in respect of rental income?
Please do not simply set test questions and expect to be provided with an answer.
You presumably have an answer in whichever book you found the question, and so in future ask what problem you have with the answer and then I will try and help.In total we received cash of 440,000 during the year.
However at the start of the year we were already owed 5,400. This will have been received this year but was income of last year. So we need to reduce the 440,000 by 5,400 to get this years income.
Also at the start of the year we were owing 12,300. This must be because someone had paid us last year some of this years rent. Therefore it is income of this year and should be added to the cash received this year.At the end of this year, we are still owed 13,400. They have not yet paid us but it is this years income and therefore we need to add it to the cash received.
Finally, at the end of this year we owe 6,700 because someone has paid us cash this year for next years rent. This is not this years income and therefore needs subtracting from the cash received.So the income for this year is 440,000 – 54,400 + 12,300 + 13,400 – 6,700
I’m sorry, I do have the answer at the back but it was so confusing that I did not understand anything so I hoped you would help me understand the whole question (which you did) as it was not the answer only that confused me. Thank you.
would it be safe to say that in the original question, the use of the phrase ‘prepaid expense’ was incorrect and it should have been ‘prepaid income’?
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