Question

Fargo Company paid in full for an annual rental lease on September 1 in the amount of $21,000 and immediately made an entry debiting Rent Expense and crediting Cash for the entire amount. Fargo's year end is December 31. Required 1: What is the proper balance of Rent Expense showing on the year end income statement? \$ Required 2: What is the proper amount of Prepaid Rent showing on the year end balance sheet? \$

Answer 1

Required 1: The proper balance of Rent Expense showing on the year-end income statement is $5,250. Calculation: The rent expense is for the entire year of which four months fall in this accounting period. Therefore, we need to accrue four months’ rent. The monthly rent would be $21,000 ÷ 12 = $1,750. Thus, four months’ rent would be $1,750 × 4 = $7,000. Rent Expense for the four months = $7,000 Prepaid Rent for the four months = $7,000 Rent Expense balance on income statement = $21,000 – $7,000 = $14,000 Required 2: The proper amount of Prepaid Rent showing on the year-end balance sheet is $7,000. Calculation: The prepaid rent is for four months. The monthly rent is $21,000 ÷ 12 = $1,750. Prepaid Rent = $1,750 × 4 = $7,000. Therefore, the proper amount of Prepaid Rent showing on the year-end balance sheet is $7,000.