Question

Cricket Lawn Service provides general lawn maintenance to customers. The company’s fiscal year-end is December 31. Information necessary to prepare the year-end adjusting entries appears below. On October 1, 2024, Cricket lent $95,000 to another company. A note was signed with principal and 8% interest to be paid on September 30, 2025. On November 1, 2024, the company paid its landlord $18,000 representing rent for the months of November through January. Prepaid Rent was debited for the entire amount. On August 1, 2024, Cricket collected $22,500 in advance rent from another company that is renting a portion of Cricket’s building. The $22,500 represents one year’s rent, and the entire amount was credited to Deferred

Answer 1

This accounting question requires calculating the interest on a loan for three months, adjusting for prepaid rent, and apportioning rental income received in advance for the time that corresponds to the current and subsequent fiscal year.

Step-by-step explanation:

Cricket Lawn Service's question pertains to accounting practices related to year-end adjusting entries. The company needs to recognize interest revenue, adjust for prepaid rent, and recognize rental income that was received in advance. For the loan made on October 1, 2024, since the fiscal year ends on December 31, the company should recognize interest accrued for three months (October through December). The interest accrued can be calculated as $95,000 × 8% × (3/12). For the rent paid in advance, since the company paid for three months but only two months pertain to the current fiscal year (November and December), one month's rent will carry over to the next year and should be reported as Prepaid Rent on the balance sheet. Finally, for the rent collected in advance, since the amount represents one year's rent but only five months pertain to the current fiscal year (August through December), the company should recognize five months of rent as revenue and defer the remaining seven months to the next fiscal year.