Question

Leyland Realty Company received a check for $15,000 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 $15,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31:
a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500.
b. debit Rent Revenue, $2,500; credit Unearned Rent Revenue, $2,500.
c. debit Unearned Rent Revenue, $15,000; credit Rent Revenue, $15,000.
d. debit Cash, $15,000; credit Rent Revenue, $15,000.

Answer 1

Answer: The correct answer is a. debit Unearned Rent Revenue, $2,500; credit Rent Revenue, $2,500.

Explanation: Leyland Realty Company receipt of $15,000 represents an unearned revenue because the 6-month rent has not been utilized. Since the term is for 6 months, monthly amortization would be $15,000 ÷ 6 months = $2,500. This amount now serves as the monthly amortization, which would be unwound to revenue and the amount in liability (unearned revenue) would gradually decrease until it becomes zero.

Now that a month has elapsed (1 July - 31 July), an amount of $2,500 calculated above would be unwound to revenue (income statement) by Debiting Unearned revenue $2,500 and Crediting Revenue $2,500.