Question on prepayments — OpenTuition Forums

MMateusz8y ago

Hello Sir I've got a question from Becker Revision Kit. 1.13 During the year ended 30 september 20x6, Priceless Co recorded the following cash transactions: 1)Payment of an annual insurance premium of $12,000 for the period to 31 December 20x6 2)Receipt of $6,000 in respect of rent from a tenant covering the three month period to 30 November 20x6 What is the impact on the profit and net asset of making the year-end adjustments for prepaid income and expenditure at 30 September 20x6? Profit Net assets a) Decrease 1000 Increase 1000 b) Decrease 7000 Increase 7000 c) Decrease 1000 Decrease 1000 d) Increase 7000 Increase 7000 My workings give me $7000 decrease in profit (expenditure $9000 and income $2000) and $7000 decrease in Net asset (assets decrease $3000, liabilities increase $4000). Can you please indicate what I am doing wrong?

John MoffatTutor8y ago#1

Before the year end adjustment for insurance, 12,000 will have been charged as an expense. There is a prepayment of 3/12 x 12,000 = 3,000, and therefore making the adjustment will reduce the expense for the year - and so increase the profit by 3,000, and an asset (prepayment) of 3,000 will appear. As far as the receipt for rent is concerned, the 6,000 was received this period and so before the year end adjustment the whole of the 6,000 will have been recorded as income. 2 months of this rent relates to the following period, so 2/3 x 6,000 = 4,000 will be removed from the income - so less profit, and 4,000 will appear as a liability. So in total there will be a 1,000 decrease in the profit and a 1,000 decrease in the net assets.

MMateusz8y ago#2

Oh now I understand. The profit was already calculated and I had to add adjustments only. Thank you very much for a prompt reply and for your lectures!

John MoffatTutor8y ago#3

You are welcome :-)

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