Question

enario #4: Law Orrice of Casey Novak (6 points, April 15, 2018, the Law Office of Casey Novak signed a one-year lease with Cabot P office space from May 1, 2018 through April 30, 2019 at a cost of $7,200 per month. During 2018 the Law Office of Casey Novak used the office space from May 1 through December 31 as provided by the lease. puring 2018 the Law Office of Casey Novak paid $86,400 cash to Cabot Properties as rent payments. (2 points per amount 6 points) Amount How much Rent Expense would the Law Office of Casey Novak a) recognize in its 2018 GAAP Income Statement? SUPPORTING COMPUTATION REQUIRED: What amount, if any, would the Law Office of Casey Novak report as Prepaid Rent in its GAAP Statement of Financial Position at December 31, 2018? b) What amount, if any, would the Law Office of Casey Novak report as c) Rent Payable in its GAAP Statement of Financial Position at December 31, 2018?

Answer 1

Contract was done for the period of one year from 01/05/2018 to 30/04/2019 @ $7200 per month. During 2018 the law office of Casey Novak used the office space from 01/05/2018 to 31/12/2018 and paid rent of $ 86400 i.e. for the period of 12 months.

1) How much rent expenses will be recognized in 2018: As the lease begins from 01/05/2018 and the year ends in 31/12/2018 i.e. the office was used only for the period of 8 months in year 2018 however the rent was paid for 12 months.

As per GAAP we need to recognize the expenses which becomes due. in this case the expenses for 8 months (from 01st May 2018 to 31st December 2018) became due in year 2018 i.e. $ 7200X 8 months= $ 57600 will be recognize as rent expenses.

2) Prepaid expenses are the expenses which are paid in advance but the expenses were not become due i.e. not incurred. in this case rent paid for 12 months however the rent paid in advance for 01st Jan 2019 to 30 th April 2019 i.e. for 4 months so rent of $ 7200X 4 Months= $28800 will be recognize as Prepaid Rent Expense as at 31st December 2018.

3) Rent payable means rent becomes due but not yet paid as on date. in this case rent has been paid in advance therefore there is no question of rent payable so no amount will be recognize as rent payable as on 31 st December 2018.