Question

To journalize the adjusting entry required for unearned rent on December 31, you need to recognize the portion of the unearned revenue that has been earned as of the end of the year. Given that the company received $43,170 for 12 months of rent on August 1, by December 31, 5 months have passed (from August 1 to December 31).

Answer 1

To adjust for earned rent, debit Unearned Rent and credit Rent Revenue for $17,987.50, which represents 5 months of the prepaid 12-month rent amount of $43,170 calculated as $3,597.50 per month.

Step-by-step explanation:

To journalize the adjusting entry for unearned rent on December 31, first compute the amount of rent earned. The total rent received was $43,170 for 12 months, which means the monthly rent is $43,170 ÷ 12 = $3,597.50. Since 5 months have elapsed from August 1 to December 31, the earned rent is $3,597.50 × 5 = $17,987.50. Therefore, the adjusting entry would be to debit Unearned Rent for $17,987.50 and credit Rent Revenue for the same amount.

This reflects the revenue recognition principle, which states that revenues should be recognized when they are earned, regardless of when the cash is received. By the end of December, five months' worth of the prepaid rent has been 'converted' from unearned (liability) to earned (revenue), necessitating the adjustment. This ensures that the company's financial statements for the year provide an accurate representation of the actual rent earned during the period.