Question

In the current year, Jerry signed a 5-year lease to rent space to the MacBee restaurant. That year, MacBee paid Jerry $24,000 for the first year’s rent and $24,000 for the last year’s rent. Jerry reports his income using the accrual method of accounting.

How much of the $48,000 is included in Jerry’s current-year income?

A. $ 24,000
B. $120,000
C. $ 48,000
D. $ 0

Answer 1

A. $ 24,000

Step-by-step explanation:

Given that Jerry received $24,000 for the first year’s rent and $24,000 for the last year’s rent, the amount received for the first year's rent is the amount earned by Jerry in the first year and as such is recognized as the income for the year.

The $24,000 received as rent for the last year is not an earned income but a deferred income. It may also be called unearned revenue and is accounted for as a liability until it is earned (in the last year).

As such, only $24,000 of the $48,000 received is included in Jerry’s current-year income.