Question

On October 1, Vista View Company rented warehouse space to a tenant for $2,600 per month. The tennant paid five months rent in advance on that date, with the lease begginning immediately. The cash recipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

Answer 1

The adjusting entry needed on December 31 is:

December 31

Debit : Unearned Rent $7,800

Credit : Rent Income $7,800

Step-by-step explanation:

First, lets go through the accounting process of this journal as it started on October 1. Then afterwards we get to understand what needs to be adjusted and how.

October 1 - Vista View Company receives rent in advance.

Vista View Company, is not yet entitled to this amount since tenant has not used its services yet. That why the journal should be a simple Debit of Cash and Credit of Unearned Rent by the total of five months paid in advance $13,000 ($2,600 x 5 months).

December 31 - Now three months have expired and this period the Landlord is entitled to the amount that was previously received but only for the 3 months period.

Thus we need to recognize revenue and de-recognize the Unearned Rent liability with the amount for 3 months` rent