Final answer:
The December 31, 2014 adjusting entry for Lopez Company to recognize nine months of earned rent from a year's advance payment would be a debit to Unearned Rent Revenue and a credit to Rent Revenue for $10,800.
Step-by-step explanation:
The student's question pertains to the accounting treatment of advance rent received and the related adjusting entry at the end of the fiscal year.
When Lopez Company received $14,400 on April 1, 2014 for one year's rent in advance, it should have recorded this amount as a liability in an account called Unearned Rent Revenue because the service (the use of rental space) had not yet been provided. By December 31, 2014, nine months of rent have been 'earned,' thus requiring an adjustment to recognize the rent revenue that has been earned during this period.
The adjusting entry on December 31, 2014, would involve a debit to the Unearned Rent Revenue account and a credit to the Rent Revenue account to reflect the portion of the prepayment that has now been earned. The amount to be recognized would be $14,400 divided by 12 months, times 9 months, which equals $10,800. So, the entry is:
- Debit Unearned Rent Revenue $10,800
- Credit Rent Revenue $10,800