Chapter 4, Problem 17E

The following two events occurred for Trey Co. on October 31, the end of its fiscal year.

1. a. Trey rents a building from its owner for $2,800 per month. By a prearrangement. the company delayed paying October’s rent until November 5. On this date, the company paid the rent for both October and November.
2. b. Trey rents space in a building it owns to a tenant for $850 per month. By prearrangement, the tenant delayed paying the October rent until November 8. On this date, the tenant paid the rent for both October and November.

Required

1. 1. Prepare adjusting entries that the company must record for these events as of October 31.
2. 2. Assuming Trey does not use reversing entries, prepare journal entries to record Trey’s payment of rent on November 5 and the collection of the tenant’s rent on November 8.
3. 3. Assuming that the company uses reversing entries, prepare reversing entries on November 1 and the journal entries to record Trey’s payment of rent on November 5 and the collection of the tenant’s rent on November 8.

To determine

Prepare adjusting entries that the company must record for these events as of October 31.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare adjusting entries that the company must record for these events as of October 31.

Date	Accounts title and explanation	Debit ($)	Credit ($)
October 31	Rent expense (SE-)	2,800
	Rent payable (L+)		2,800
	(To record the accrued rent expense.)

Table (1)

• Rent expense is an expense account and it decreases the stockholders’ equity by $2,800. Therefore, debit rent expense with $2,800.
• Rent payable is a liability account and it is increased by $2,800. Therefore, credit rent payable with $2,800.

Date	Accounts and Explanation	Debit ($)	Credit ($)
October  31	Rent receivable (A+)	850
	Rent earned (SE+)		850
	(To record accrued rent income.)

Table (2)

Justification:

• Rent receivable is an asset account and it is increased by $850. Therefore, debit rent receivable account with $850.
• Rent earned is revenue account and it increases the value of stockholders’ equity by $850. Therefore, credit rent earned account with $850.

To determine

Prepare journal entries to record T’s payment of rent on November 5 and the collection of the tenant’s rent on November 8.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Prepare journal entries to record T’s payment of rent on November 5:

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 5	Rent payable (L-)	2,800
	Rent expense (SE-)	2,800
	Cash (A-)		5,600
	(To record the payment of 2 months’ rent.)

Table (3)

• Rent payable is a liability account and it is decreased by $2,800. Therefore, debit rent payable with $2,800.
• Rent expense is an expense account and it decreases the stockholders’ equity by $2,800. Therefore, debit rent expense with $2,800.
• Cash is an asset account and it is decreased by $5,600 for the payment of rent. Therefore, credit cash account with $5, 600

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 8	Cash (A+)	1,700
	Rent receivable (A+)		850
	Rent earned (SE+)		850
	(To record collection of 2 months’ rent.)

Table (4)

Justification:

• Cash is an asset account and it is increased by $1,700 for the collection made. Therefore, debit cash account with $1,700.
• Rent receivable is an asset account and it is increased by $850. Therefore, debit rent receivable account with $850.
• Rent earned is revenue account and it increases the value of stockholders’ equity by $850. Therefore, credit rent earned account with $850.

To determine

Prepare the reversing entries on November 1 and the journal entries to record T’s payment of rent on November 5 and the collection of the tenant’s rent on November 8.

Explanation of Solution

Reversing entry: Reversing entries are recorded in response to the accrued liabilities and accrued assets that were generated by adjusting entries at the end of an accounting period. These reversing entries are optional. The objective of the reversing entry is to simplify the company’s record keeping.

Prepare the reversing entries on November 1:

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 1	Rent payable (L-)	2,800
	Rent expense (SE+)		2,800
	(To record the reverse entry for accrual of rent expense.)

Table (5)

Justification:

• The adjusting entry is to be reversed, thus, to reverse the liability of rent payable created. Therefore, debit the rent payable account with $2,800.
• The rent expense is recognized and shall be reversed by crediting the rent expense account.

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 1	Rent earned (SE-)	850
	Rent receivable (A­­-)		850
	(To record the reverse entry for accrual of net income.)

Table (6)

Justification:

• The rent earned is recognized, which was earlier credited while recording the adjusting entry, shall be reversed by debiting the rent earned Account.
• The adjusting entry is to be reversed, thus, to reverse the asset of rent receivables created which was debited while recording the adjusting entry, credit the rent receivable Account.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Prepare the journal entries to record T’s payment of rent on November 5 and the collection of the tenant’s rent on November 8:

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 5	Rent expense (SE-)	5,600
	Cash (A-)		5,600
	(To record the payment of 2 months’ rent.)

Table (7)

• Rent expense is an expense account and it decreases the stockholders’ equity by $5,600. Therefore, debit rent expense with $5,600.
• Cash is an asset account and it is decreased by $5,600 for the payment of rent. Therefore, credit cash account with $5, 600

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 8	Cash (A+)	1,700
	Rent earned (SE+)		1,700
	(To record collection of 2 months’ rent.)

Table (8)

Justification:

• Cash is an asset account and it is increased by $1,700 for the collection made. Therefore, debit cash account with $1,700.
• Rent earned is revenue account and it increases the value of stockholders’ equity by $1,700. Therefore, credit rent earned account with $1,700.