Question

On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months' rent in advance on that date, with the lease beginning immediately. The cash receipt was credited to the Unearned Rent account. The company's annual accounting period ends on December 31.
Prepare the adjusting entry needed on December 31.

Answer 1

Answer:

31 December  Unearned Rent         $7500 Dr

                               Rent Revenue         $7500 Cr

Explanation:

The adjusting entry is made by a company following the accrual principle which states that the revenues and expenses for a period should be matched and recorded in that particular period. Thus, the rent relating to the period form October to December should be recorded as revenue in the current year period.

As the rent was paid in advance and a liability was created as unearned rent. When we will record the revenue for this period while making the adjusting entry, we will reduce the liability and debit it. Thus, the entry should be a credit to rent revenue and a debit to unearned rent.