Question

Cheyenne Corp. received a check for $15840 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $15840. Financial statements will be prepared on July 31. Cheyenne's should make the following adjusting entry on July 31:

a. Debit Unearned Rent Revenue, $15840; Credit Rent Revenue, $15840.
b. Debit Cash, $15840; Credit Rent Revenue, $15840.
c. Debit Unearned Rent Revenue, $4710; Credit Rent Revenue, $4710. d. Debit Rent Revenue, $4710; Credit Unearned Rent Revenue, $4710.

Answer 1

Debit Unearned Rent Revenue, $2640;

Credit Rent Revenue, $2640.

(Not given in the options)

Step-by-step explanation:

Cash collected in advance results in the creation of an asset and a liability in the company's books. The asset is accounted for as a debit in cash account and the liability as a credit to Unearned Rent Revenue.

To recognized revenue when it is earned, credit revenue and debit Unearned Rent Revenue with the amount earned to reduce the liability by the amount amount earned.

Between 1 July and 31 July is a month, the revenue earned in one month

= 1/6 × $15840

= $2640

This is recognized at 31 July by

Debit Unearned Rent Revenue, $2640;

Credit Rent Revenue, $2640.

Being entries to recognize revenue earned at the end of the period.