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Karen runs a floristry business. She has made payments for website maintenance as follows
12 June 2008 $120 to cover the 3 months to 31 August 2008
1 September 2008 $150 to cover the 3 months to 30 November 2008
7 December 2008 $ 150 to cover the 3 months to 28 February 2009
2 March 2009 $ 165 to cover the 3 months to 31 May 2009
1 June 2009 $ 165 to cover the 3 months to 31 August 2009
What is the website maintenance expense for the year ended 30 June 2009 and the prepayment at that date?
Website Maintenance.
Prepayment b/f (2/3 ×120) 80
1.9.08 150
7.12.08 150
2.3.09 165 Retained profits 600
1.6.09 165 Prepayment (2/3×165) 110
710 710Please explain Prepayment brought forward and Retained Earnings .
Thank you!
We are asked for the expense for the year from 1 July 2008 to 30 June 2009.
Given that the payment in June 2008 (which was before our year started) covered June, July and August 2008 then the first two months of our year (July and August) had been prepaid. Since the amount paid for 3 months was $120, the prepayment for 2 months was 2/3 x 120.
Similarly, as at 30 June 2009 they had already paid $165 for June, July and August. July and August are not in our year and therefore there is a prepayment at the end of the year of 2/3 x 165 = $110.
So the total expense for our year is the opening prepayment of 80 plus the cash paid during the year of 630 (150 + 150 + 165 + 165) less the closing prepayment of 110. A total expense in the SOPL of $600.
Have you watched my free lectures on accruals and prepayments? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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