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?
A $1,000 decrease
B $1,500 increase
C $1,000 increase
D $1,500 decrease
Sir in the solution they have not considered 1st point rent was paid on 2nd january for 1 January to 31 December 20X7. that means for the year ended 30 April 20X8 10500/12*8=7000 was prepaid in the previous year and relates to this year when we adjust for this then ouir profit should decrease by 7000 right? they havent considered this while calulating increase or decrease in profit why is that so sir?
33.6 C(THE SOLUTION IN TEXT)
$
Rent accrual (4/12 ? $12,000) (4000)
Insurance prepayment (10/12 ? $6,000) 5000
Net increase in profit 1000
Ask the Tutor ACCA FA
MIXED QESTION BANK BPP
5y ago#1Although the rent paid of $10,500 was prepaid last year, the prepayment would have been entered correctly in the accounts last year. All that needs correcting this year is the fact that an accrual has not been made for the period 1 January X8 to 30 April X8.
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