Question

Mouse Inc. received a $2,500 prepayment of rent from one of its tenants and immediately credited the Rent revenue account. By the end of the period, $500 of the rent had not been earned by Mouse Inc.. Demonstrate the required adjustment needed at the end of the period.

Answer 1

Debit Rent revenue $500

Credit Unearned rent account $500

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

Step-by-step explanation:

For Cash collected in advance, we post a debit in cash account and a credit to Unearned Rent Revenue.

To recognized revenue when it is earned from rent, the entries required are credit Rent revenue and debit Unearned Rent Revenue with the amount earned.

However, in this instance, when cash was collected in advance, the entries posted were

Debit Cash account $2,500

Credit Rent revenue account $2,500

The amount posted to rent revenue should have been posted to the Unearned or deferred revenue account.

If that the end of the period, $500 had not been earned, we would defer this amount by posting the following entries

Debit Rent revenue $500

Credit Unearned rent account $500

Being entries to recognize revenue yet to be earned