2. One-third of the unearned rent revenue was recognized during the quarter. Unearned Rent Revenue 9,900 Rent Revenue 60,000 Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
(Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
The correct answer and explanation is:
Adjusting Entry for Unearned Rent Revenue
Journal Entry at March 31:
| Date | Account Titles | Debit ($) | Credit ($) |
|---|---|---|---|
| March 31 | Unearned Rent Revenue | 3,300 | |
| Rent Revenue | 3,300 |
Explanation:
Adjusting entries are necessary to allocate revenue and expenses to the proper accounting periods, ensuring the financial statements reflect accurate financial performance. The given data indicates that one-third of unearned rent revenue was recognized during the quarter.
Calculation:
The total Unearned Rent Revenue is $9,900. Since one-third of this revenue is earned, we calculate the adjustment as: 9,9003=3,300\frac{9,900}{3} = 3,300
This means that $3,300 of previously unearned rent revenue has now been earned.
Accounting Treatment:
- Debit Unearned Rent Revenue ($3,300): This decreases the liability because part of the unearned revenue has now been recognized as earned.
- Credit Rent Revenue ($3,300): This increases revenue as it has now been earned and should be reported in the income statement for the quarter ending March 31.
Why is This Adjustment Necessary?
- Accrual Basis Accounting: Revenue must be recorded in the period it is earned, regardless of when cash is received.
- Matching Principle: Recognizing revenue in the appropriate period ensures accurate financial reporting.
This adjustment ensures the correct balance of liabilities and revenues, improving the accuracy of financial statements for stakeholders.
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