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    trca4596's Avatar
    trca4596 Posts: 9, Reputation: 1
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    #1

    Feb 18, 2012, 01:23 AM
    RENT expense/Adjusting Entries
    I've had a similar problem like this before and need some help trying to just make sure I'm doing things right. Any help would be greatly appreciated since I know I am wrong :(

    Bal at end Sept 30,19xx
    Cash 18,000 D
    Rent Payable 0
    Fees Earned 140,000 C
    Rent Expense 13,200 D

    Year end adjustments:

    A. The lease for the office requires the company to pay total rent for the year equal to 10% of the company's annual revenues. The rent is paid to the building owner with monthly payments of $1,100. If the annual rent exceeds the total monthly payments, the company must pay the excess. If the total is less than the amount previously paid, the owner will refund the difference.

    Here is my issue. I'm not sure if the "Fees earned" would be my Revenues? Because even though there are a few more accounts I could put up, this is the only one in the "400" account number.

    And if that is my annual Rev, how do I go about figuring what the adjustment would be?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Feb 18, 2012, 07:37 AM
    The 140,000 Fees Earned probably is the only revenue amount to be considered for this purpose. The point of the problem is to focus on the rent adjustment, and I doubt they'd dilute that focus by making you sift through a bunch of accounts to determine which are Revenues, and which aren't. The fact that this one is the only one with a 4xx type account number also suggests this. Still, that's just guesswork on my part and not a definitive answer.

    With respect to the adjustment itself, just parse through the question one piece at a time:
    What is 10% of the company's revenues?
    So far, the company has paid 12 months. X 1,100 = 13,200.
    Is this more or less than the required 10% of revenues?
    Thus, how much does the company owe in additional rent, or how much refund does the landlord owe back to the company?
    This additional amount owed by the company to the landlord, or the amount the landlord owes back to the company, is the adjustment. If it's the former, debit rent expense and credit rent payable. If it's the latter case, credit rent expense and debit some account such as Overpaid Rent Receivable.

    Hint: After your adjustment, the Rent Expense account should precisely equal 10% of the company's total revenue, in agreement with the rental contract.
    trca4596's Avatar
    trca4596 Posts: 9, Reputation: 1
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    #3

    Feb 18, 2012, 10:44 AM
    Ok so since that would be the Rev account.
    I have taken 140,000*10%= 14,000

    This is over the 13,200. So a refund of 800 is needed.

    So... Credit rent expense 800, and debit receivable.
    If I don't have a receivable do you think should add one?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #4

    Feb 18, 2012, 12:18 PM
    Okay, let's think it through a bit. The lease contract requires the company to pay 10% of its revenues to the landlord as rent. You've correctly figured that the company owes a total of 14,000 to the landlord for this particular year. In other words, since the company's revenues this year were 140,000 it means the landlord is entitled to receive total rent payments of 14,000 for this year.

    Now, the company has paid 13,200 to the landlord so far. Does this indicate that the company still owes some more to the landlord, or that the landlord owes a refund back to the company?

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