Question

On November 1, Year 2, Stokes Company paid Eastport Rentals $32,000 for a 12-month lease on warehouse space. Required Record the deferral and the related December 31, Year 2, adjustment for Stokes Company in the accounting equation. Record the deferral and the related December 31, Year 2, adjustment for Eastport Rentals in the accounting equation.

Answer 1

Answer:

At receipt of payment on November 1, Year 2, entries required

Dr Cash   $32,000 (Asset)

Cr Deferred rental revenue  $32,000 (Liabilities)

On December 31, adjustment required

Dr Deferred rental revenue  $5,333.33 ( Liabilities)

Cr Rental revenue  $5,333.33 (Equity)

Hence the accounting equation becomes

$32,000 = $26,666.67 + $5,333.33

Assets (Cash) = Liabilities (Deferred rental revenue) + Equity (Rental revenue)  

Explanation:

The accounting equation is given as

Assets = ,Equity + Liabilities

Given that Stokes Company paid Eastport Rentals $32,000 for a 12-month lease on warehouse space, the monthly income to Eastport Rentals

= $32,000/12

= $2,666.67

Hence between November 1, Year 2 and December 31, Year 2, the income earned

= $2,666.67 * 2

= $5,333.33

The amount unearned (or deferred) at December 31, Year 2

= $32,000 - $5,333.33

= $26,666.67

At receipt of payment on November 1, Year 2, entries required

Dr Cash   $32,000 (Asset)

Cr Deferred rental revenue  $32,000 (Liabilities)

On December 31, adjustment required

Dr Deferred rental revenue  $5,333.33 ( Liabilities)

Cr Rental revenue  $5,333.33 (Equity)