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Joanna has prepared her draft financial statements for the year ended 30 April 20X8, and needs to
adjust them for the following items:1 . Rent of $10,500 was paid and recorded on 2 January 20X7 for the period 1 January to
31 December 20X7. The landlord has advised that the annual rent for 20X8 will be $12,000
although it has not been invoiced or paid yet.2. Property and contents insurance is paid annually on 1 March. Joanna paid and recorded $6,000
on 1 March 20X8 for the year from 1 March 20X8 to 28 February 20X9.
What should the net effect on profit be in the draft financial statements for the year ended
30 April 20X8 of adjusting for the above items?What should the net effect on profit be in the draft financial statements for the year ended
30 April 20X8 of adjusting for the above items?
A $1,000 decrease
B $1,500 increase
C $1,000 increase
D $1,500 decreaseAnswer is C as per BPP Kit.
My answer:
Prepayment b/f 7000 (8/12*10500)
Accured exp c/f 4000 (12000*4/12)
Prepayment c/f 5000 (6000*10/12)
Cash paid in the year 6000
SOPL = 12000 (7000+4000+6000-5000)Why the 7000 of prepayments have been excluded from the calculation?
As at 30 April 20X8 there is only the accrual for the rent for the period from 1 January to 30 April 20X8.
Nothing is prepaid for rent as at 30 April 20X8.
(There would have been a prepayment at the start of the period, but this is irrelevant. It will have been charged as an expense during this period.)
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