Question

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

Answer 1

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