Page 396 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 20

Example 2

A business entity commenced trading on 1 March and pays rent quarterly in
advance on 1 March, 1 June, 1 September and 1 December. The annual
rental is $4,800.

$
1 Mar 1,200
1 Jun 1,200
1 Sep 1,200
1 Dec 1,500
The annual rental was increased to $6,000 per annum with effect from 1
December 20X1. The accounting year end is 31 December.

Required:

Prepare the rent expense account for the accounting period ended 31
December 20X1.

Example 2: Solution

Rent expense
Dr $ Cr $
01-Mar Bank 1,200
01-Jun Bank 1,200
01-Sep Bank 1,200 31-Dec Prepayment 1,000
Statement of
01-Dec Bank 1,500 31-Dec profit or loss 4,100
5,100 5,100

The prepayment is for January and February 20X2, which is at the new rate of
$500 per month. This amount will be debited to the prepayment expenses
account which will appear on the statement of financial position under current
assets. The charge to the statement of profit or loss can be confirmed as
being 9 months at the old rate of $400 per month, and one month at the new
rate of $500 per month, that is, $4,100.

At the beginning of the following year, 20X2, the prepayment will be reversed,
i.e. credit prepayment account and debit rent payable account.

390