Question

During 20x7, Advance Limited paid a total of $180,000 for rent, covering the period from 1 October 20x6 to 31 March 20x8. Which of the following should appear in the company’s financial statements for the year ended 31 December 20x7?

Income statement

Balance sheet

Group of answer choices

$150,000 expense / Accrual $45,000

$150,000 expense/ Accrual $30,000

$120,000 expense/ Prepayment $30,000

$120,000 expense/ Prepayment $45,000

$120,000 expense / Accrual $30,000

Answer 1

Rent paid for 18 months from October 1, 2006 to March 31, 2008 = $ 180,000
Rent for 1 January 2007 to 31 December 2007 = ( 180,000 / 18 ) * 12 months
				= $ 120,000
Expense to show in 31 December2007 Balance Sheet = $ 120,000
Prepymen of Rent = From 1 January 2008 to 31 March 2008
Prepayment of Rent = ( 180,000 / 18 months ) * 3 months
		= $ 30,000
Option $ 120,000 expense / Prepayment $ 30,000 is correct
Income Statement	Expense $ 120,000
Balance Sheet	Prepayment $ 30,000