So I thought I understood prepaid rent; however, one of my questions is continually showing to be wrong.Here it is: "Journal entries for prepaid rent. ABB Group (ABB), headquartered in Switzerland, is one of the world's largest engineering companies. ABB applies U.S. GAAP, and reports its results in millions of U.S. dollars. Based on ABB's financial reports for fiscal 2007, at January 1, 2007, ABB reported a balance in its Prepaid Rent account of $247 million; assume that this amount reflects its prepayments of rent on factory and office space for the next month. Assume also that on January 31, 2007, ABB paid $3,200 million as the annual rent for the period from February 1, 2007, to January 31, 2008. ABB has a calendar year reporting period."The journal entries I can't seem to get right are these:"December 31Rent Expense:______Prepaid Rent:_____(To record the adjusting entry for the consumption of the prepaid portion of rent expense for the months of February through December. )"I would think I would need to adjust it by $2933 million in both categories, as 11 months are included in that period. What am I doing wrong?
So I thought I understood prepaid rent; however, one of my questions is continually showing to be wrong.Here it is: "Journal entries for prepaid rent. ABB Group (ABB), headquartered in Switzerland, is one of the world's largest engineering companies. ABB applies U.S. GAAP, and reports its results in millions of U.S. dollars. Based on ABB's financial reports for fiscal 2007, at January 1, 2007, ABB reported a balance in its Prepaid Rent account of $247 million; assume that this amount reflects its prepayments of rent on factory and office space for the next month. Assume also that on January 31, 2007, ABB paid $3,200 million as the annual rent for the period from February 1, 2007, to January 31, 2008. ABB has a calendar year reporting period."The journal entries I can't seem to get right are these:"December 31Rent Expense:______Prepaid Rent:_____(To record the adjusting entry for the consumption of the prepaid portion of rent expense for the months of February through December. )"I would think I would need to adjust it by $2933 million in both categories, as 11 months are included in that period. What am I doing wrong?
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Following are three separate transactions that pertain to prepaid items. Evaluate each item and prepare the journal entries that would be needed for the initial recording and subsequent end-of-20X3 adjusting entry. Assume the company uses the balance sheet approach, and the initial recording is to an asset account. The company has a calendar year-end and does not make any adjusting entries prior to December 31.
| (1) | The company purchased an 18-month insurance policy for $18,000 on June 1, 20X3. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (2) | The company started 20X3 with $20,000 in supplies (this was previously recorded, and you do not need to make an entry for the beginning balance), purchased $30,000 in supplies during the year, and found only $13,000 in supplies on hand at the end of 20X3. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (3) | The company paid $2,500 to rent a truck. The rental period began on December 16, 20X3, and ends on February 14, 20X4.
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On January 1, 2013, NRC Credit Corporation leased equipment toBrand Services under a direct financing lease designed to earn NRCa 12% rate of return for providing long-term financing. The leaseagreement specified:
| a. | Twelve annual payments of $64,000 (including executory costs)beginning January 1, 2013, the inception of the lease and eachDecember 31 thereafter through 2021. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| b. | The estimated useful life of the leased equipment is 12 yearswith no residual value. Its cost to NRC was $403,080. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| c. | The leasequalifies as a capital lease to Brand. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| d. | A 12-year service agreement with Quality Maintenance Company wasnegotiated to provide maintenance of the equipment as required.Payments of $5,900 per year are specified, beginning January 1,2013. NRC was to pay this executory cost as incurred, but leasepayments reflect this expenditure. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A partial amortization schedule, appropriate for boththe lessee and lessor, follows
Assume the contract specified that NRC (the lessor) wasto pay, not only the $5,900 maintenance fees, but also insurance of$790 per year, and was to receive a $340 management fee forfacilitating service and paying executory costs. The lesseeâs leasepayments were increased to include an amount sufficient toreimburse executory costs plus NRCâs fee.
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