Beach Realty rents a factory building for 20 years at an annual rental rate of $

Question

Beach Realty rents a factory building for 20 years at an annual rental rate of $42,000, beginning June 1, 2004. The lease agreement requires the lessee to pay one year's rent in advance. Beach Realty records the June 1 payment as a credit to rental income. Beach Realty is a calendar year basis accrual reporting entity. On December 31, 2004 Beach Realty will make the following adjusting entry:
a.Unearned Rent 17,500
Rental Income 17,500

b.Rental Income 17,500
Unearned Income 17,500

c. Unearned Rent 24,500
Rental Income 24,500

d. Rental Income 24,500
Unearned Rent 24,500

Explanation / Answer

On June 1st, one year's rent is paid in advance. The journal entry would be recorded as:

Cash to Rental income. Debit cash and Credit rental income.

The adjusting entry from June to December would be reported as

Number of months from June to December are 7 months

Calculating the rental income for 7months = (7/12) * $42,000
= $24,500

The adjusting entry for the rental income under accrual basis will be reported as:

Debit Rental income credit Unearned rent.

Therefore, the correct option is

Particulars Dr. Cr.
Rental income $24,500
Unearned rent $24,500

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