Question

Accrual Based Accounting – Adjusting Journal Entries (AJEs): Say Something, Inc. rents equipment for the 12 months, paying $14,400 cash in advance on August 1^st, 2019 for the rental period of August 1^st, 2019 – July 31, 2020.

1. Record the journal entry for the original payment in advance on August 1^st, 2019.
2. Record the adjusting entry to recognize Rent Expense on December 31^st, 2019. Assume Say Something uses an annual accounting period which ends on December 31^st, 2019 and adjusting entries are only made at the end of the annual accounting period on 12/31 (i.e. assume no adjusting entries have been recorded yet).
3. What if we did not make the adjusting entry on 12/31/19 to recognize this expense? Indicate by how much assets, liabilities, and SHE would be either under- or overstated if this adjusting entry were not recorded. If no effect, write ‘no effect.’
4. Assuming we do recognize this expense at the end of the accounting period on 12/31/19, what will the ending balance of the ‘Prepaid Rent’ account be on December 31, 2019 (Assume the balance of Prepaid Rent on July 31^st, 2019 was $0 and Say Something, Inc. has no other prepaid assets)?

Answer 1

	a	Date	Dr/Cr	Particulars	Debit $	Credit $
		August 01, 2019	Debit	Prepaid rent	14,400
			Credit	Bank/cash		14,400
				(To record the advance rent paid for the period August 01 2019 to July 31,2020)
	b	Date	Dr/Cr	Particulars	Debit $	Credit $
		December 31, 2019	Debit	Rent expenses	6,000
			Credit	Prepaid rent		6,000
				(To record the rent expenses for the period August 01 2019 to December 31,2019)
				=14,400/12 months*5 months
	c	Effect on the asset, liabilities and profit and retained earning
		Particulars	Effect	Remarks
		Asset	Over stated	if we did no pass the entry then prepaid expenses would have shown at $ 14,400 instead of $ 8,400 so the asset would have been over stated by $ 6,000
		Liabilities	No effect
		Profit for the current period	Over stated	if we did no pass the entry then rent expenses from August to December 2019 would not have been recorded in the income statement and net income would have been over stated by $ 6,000
		Retained earning	Over stated	if we did no pass the entry then rent expenses from August to December 2019 would not have been recorded in the income statement and net income would have been over stated by $ 6,000 and corresponding the retained earning also over stated by $ 6,000
	d	Balance of prepaid rent at the end of December 31, 2019 assuming that the company has passed the adjusting entry for recording the rent expenses
	Cell reference	Particulars	Amount $
	A	Opening balance of prepaid rent	0
	B	Advance rent paid	14,400
	C	Rent expenses recognized	6,000
	D=A+B-C	Closing balance of prepaid rent	8,400