Question

# On November 1, 20X3, your calendar year company receives \$40,000 for space it is subletting for...

On November 1, 20X3, your calendar year company receives \$40,000 for space it is subletting for 5 months (November 1, 20X3 through March 31, 20X4). The \$40,000 was recorded as revenue. On December 31, 20X3, you discover that an adjusting entry was never made. To correct this error you must: debit Unearned Rent for \$16,000; credit Rent Revenue for \$16,000 wait until the end of the 5-month period debit Rent Revenue for \$16,000; credit Unearned Rent for \$16,000 debit Unearned Rent for \$24,000; credit Rent Revenue for \$24,000 debit Rent Revenue for \$24,000; credit Unearned Rent for \$24,000

Revenue per month

= Amount received / Number of months

= \$40,000 / 5

= \$8,000 per month

So, Earned revenue

= Expired period x Revenue per month

= 2 (November and December) x \$8,000

= \$16,000

Revenue should have been credited by only \$16,000 as this is the portion of the amount received which is actually earned. Remaining (\$40,000 - \$16,000) = \$24,000 is unearned revenue at the end of year 1

So, Rectification entry on December 31 will include a Debit to Rent Revenue for \$24,000 in order to reduce the balance of Rent Revenue from \$40,000 to \$16,000 and a corresponding credit to Unearned rent for \$24,000

So, as per above discussion, last option is the correct option

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