Question

Mike started a calendar-year business on September 1st of this year by paying 12 months of rent on his shop at $1,450 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Answer 1

$5,800 under accural method and $17,400 under cash method.

Step-by-step explanation:

Monthly rent = $1,450

A) In accural method, Mike can only deduct up to 4 months rent. Revenue is to be recognised on accural basis, not on receipt. ==> 4 x $1,450 = $5,800

B) In cash method, Mike can deduct 12 months rent when he applies 12 month concept. ==> 12 x $1,450 ==> $17,800.

Answer 2

$4,000 under accural method and $12,000 under cash method.

Step-by-step explanation:

Monthly rent = $1,000

A) In accural method, Mike can only deduct up to 4 months rent. Revenue is to be recognised on accural basis, not on receipt. ==> 4 x $1,000 ==> $4,000

B) In cash method, Mike can deduct 12 months rent when he applies 12 month concept. ==> 12 x $1,000 ==> $12,000