A telecom company pays its annual rent of $120,000 in arrears on 31 March each year. The company's financial year end is 31 December. What is the correct accrual or prepayment entry required at 31 December 20X5?

Answer options:

Debit Prepayments $30,000, Credit Rent Expense $30,000

Debit Rent Expense $90,000, Credit Accruals $90,000

Debit Accruals $90,000, Credit Rent Expense $90,000

Debit Rent Expense $120,000, Credit Accruals $120,000

How to approach this question

Identify if rent is paid in advance or arrears. Arrears means we owe money (Accrual). Calculate the months from the last payment date to the year-end.

Full Answer

B.Debit Rent Expense $90,000, Credit Accruals $90,000✓ Correct

Rent is paid in arrears on 31 March. By 31 December 20X5, the company has occupied the premises for 9 months (April to December) without paying. The expense incurred is 9/12 × $120,000 = $90,000. This must be accrued: Debit Rent Expense $90,000, Credit Accruals (Liability) $90,000.

Common mistakes

Calculating a prepayment instead of an accrual, or calculating for 3 months instead of 9.

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