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Can anybody help me understand this question it is confusing me……. Thanks
A company receives rent from large number of properties. Total received amount in the year ended 30 june 20×2 was $1203000. The following were the amounts of rent in advance and in arears in 30 June 20×1 and 30 June 20×2:
30 June 20×1
Rent received in advance $71750
Rent in arrears ( all subsequently received) $5300030 June 20×2
Rent received in advance $78000
Rent in arrears ( all subsequently received) $46000what amount of rental income should appear in the company’s income statement for the year 30 June 20×2?
Answer:$1189750
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[ol]Opening arrears b/d $53000 opening rent b/d $71750
[ol]income satement $1189750 cash rec $1203000[/ol]
[ol]Closing rent c/d $78000 Closing arrears c/d $46000
$320750 $1320750[/ol]
rent income have a credit balance cash being received, while rent expense have a debit balance money being paid out .hope this is helpful.
After Struggling to actually UNDERSTAND the logic behind it I finally got it. the answers key is more confusing with the T account. Here is the logic:
The cash you Received this year is $1203000 BUT there are 3 parts of this cash:
the late payment from year before (Rent in arrears)
payments for this year (Which should be the only one recorded in P/L)
payments for the next years (prepayments)to calculate what should be recorded in P/L:
1)We know that payments from year before should not be included in current year
“Rent in arrears ( all subsequently received) $53000″ was supposed to be paid by the end of the previous year, so we subtract it from the cash received since the profit from it doesn’t belong to current year.2)”Rent received in advance $71750” was paid in the previous year for the future (now the present) so we must add this number because it relates to this period (yes it might also account for the future periods as well but we will cancel the exceeding amount in the next steps)
3) “Rent in arrears ( all subsequently received) $46000″ this is what should’ve been already paid by the end of this year but the payment is late. (Yes part of this cash might’ve been a part of the previous year, but it got canceled out by step 1)
4)”Rent received in advance $78000” this is the payments that were made for the future period, thus it must not be included in the current years P/L. (with this step we canceled the exceeding amount in step 2)
So in the end:
Cash received – Payment that must’ve been paid year before + Payments that were paid in the previous year for the future (now the present) + Payments that must’ve been paid by the end of current year – the cash we paid during this year for the future$1203000 -$53000 + $71750 + $46000 -$78000 = $1189750
Honestly, this question was hard for me because of the language barrier and the term “Rent in arrears ( all subsequently received)” was hard to understand as a concept. it just cash that should’ve been paid by the end of that period aka the late payment.
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