Question

On November 1, 2019, Gordon Co. collected $31,800 in cash from its tenant as an advance rent payment on its store location. The six-month lease period ends on April 30, 2020, at which time the contract may be renewed.
a. Use the horizontal model to record the effect of the six months of rent collected in advance on November 1, 2016 for Gordon Co.
b. Use the horizontal model to record the effect of the adjustment that will be made at the end of each month to show the amount of rent "earned" during the month for Gordon Co.
c. If a larger advance collection was received on November 1, 2016, that had covered a longer 18-month lease period (at the same amount of rent per month), how should Gordon Co. report the unearned rent amount on its December 31, 2016, balance sheet?

Answer 1

Answer:

a. HORIZONTAL METHOD

INCOME STATEMENT

date        Income           $          -        Expenses         $       =    net income

1 Nov       -                     -                          -                    -                   -

b. adjusting

31 each  rent               5,300                 -                      -                  5,300

month

c. BALANCE SHEET AS AT 31 DEC

                Assets        =      Equity     +     Liabilities

+ bank $84,800                    -                   prepaid expense +$84,800

             

Explanation:

on 1 Nov there is no entry for the amount in the income statement because it is not yet earned only the balance sheet is affected + bank $31800 and + income received in advance ( liability) $31800

each month's rent = $31800/ 6month =$5300

18 months rent = 95400

unearned at december = 18 months - 2 months earned

                                       = 95400- 10600

                                       =$84,800