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FathinYukiko · Oct 29, 2013, 07:58 AM

Actual question:
On 1 January 2009 a business had prepaid rent of $50. During 2009, three rent payments were made of $250 each. On 31 Dec 2009, the business still owes $200 rent on account for 2009.

The business owner has charged the rent payments made during 2009 in his income (profit and loss) account.

What is the effect on net profit?

Answer choices given:

A $200 too high
B $200 too low
C $250 too high
D $250 too low

What I understand:

So the business had a prepaid rent of $50 in the beginning of the year.
During the year, the business paid $750 ($250x3).
At the end of the year there was a balance b/d of $200 in the account.
I calculated the amount to be transferred to income account is $250.

But I don't know how it affects the net profit in terms of too high/ too low. Please help! Thank you in advance.

rehmanvohra · Oct 29, 2013, 11:53 PM

But I don't know how it affects the net profit in terms of too high/ too low. Please help! Thank you in advance.

If you analyze this statement, you will realise that high/low relates to comparison of effect on net income. It seems that the question misses out the income figure for 2008.

Based on data given it seems the rent expense for the year 2009 will be $1,000. Prepare a T account:

Debit side Credit side
Balance b/f 50 Income statement 1,000
Cash 250
Cash 250
Cash 250
Balance c/f 200
Total 1,000 Total 1,000

Now it is also possible that the business may have charged rent expense based on $200 per quarter (200 x 4 = 800) as such the charge would be $200 too low (1,000 - 800). The answer would then be B.

Hope it helps.