Murphy Company sublet a portion of its warehouse for five years at an annual rental of $60,000, beginning on May 1, 2019. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rent revenue. Murphy reports on a calendar-year basis. The adjustment on December 31, 2019 for Murphy should be
A. Unearned rent revenue 20,000 revenue 20,000
B. Revenue 20,000 unearned rent revenue 20,000
C. Unearned rent revenue 40,000 revenue 40,000
D. No entry

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TomShelby TomShelby · Answer 1 · 2019-09-05T22:56:54+02:00

Answer:

C. Unearned rent revenue 40,000 debit

revenue 40,000 credit

Explanation:

The contract is 60,000 per year

per month, the rent will be 60,000/12 = 5,000

Because the payment was in advance, the rent revenue wasn't earned yet. At year-end we adjust for the portion earned and recognize this revenue.

We need to calculate the accrued rent from May 1st to December 31th

December 31th - May 1st = 8 months

8 months x 5,000 per month = 40,000

This is the amount accrued for the year.