Hi i need help with the following transactions. Right now we are learning about the accrual basis of accounting.
1.Rent Payments included $750 per month rental fee and a $900 deposit that is refundable at the end of the 2 yr lease.
2.The company manager used her personal automobile for business purposes: 10,000 km at 35 cents per km. She was not paid for the use of her car but would like to be.
Additional information:
Prepaid Rent at December 31, 2006 was 9900.
I'm not sure how to do the first one.
For the second one is it just:
Miscellaneous Expense debit 3500 and A/P credit 3500.
For 1. only the rental payment is recognized as income for the period; an entry will still be needed to recognize the 900 deposit collected, but it is not income. Is this prepaid rent or not?
For 2. there should be some kind of allowance account for mileage; I'm not sure misc exp is correct here. I don't think it would be handled as an A/P since those are usually recurring accounts. I'm not sure what the exact account titles are, but it might be something like Dr for mileage exp and Cr for employee reimbursement payable. When the actual payment is made it would be reimb.pay./cash. Check your text for what possible accounts to use.
For the first transaction, you are correct that the $750 per month rental fee should be recognized as rental income. However, the $900 deposit collected is not considered income and should be recorded separately.
To record the rental income, you would debit the Rent Receivable or Rent Income account to recognize the income earned. On the credit side, you would credit the Rent Revenue or Rent Income account to offset the debit and show the increase in income.
To record the deposit collected, you would debit the Cash account to show the increase in cash received. On the credit side, you would credit the Deferred Revenue or Unearned Rent account to show the liability created by the deposit. This liability will be recognized as rental income over the lease term.
So the journal entries for the first transaction would be:
Rent Receivable/Income Dr. $750
Rent Revenue/Income Cr. $750
Cash Dr. $900
Deferred Revenue/Unearned Rent Cr. $900
Regarding the second transaction, using Miscellaneous Expense and Accounts Payable may not be the most appropriate way to record it. Instead, you can record the mileage expense and the reimbursement payable separately.
To record the mileage expense, you would debit the Mileage Expense or Travel Expense account to show the expense incurred. On the credit side, you would credit an Allowance for Mileage Expense account to offset the debit and recognize the liability created.
To record the reimbursement payable, you would debit the Reimbursement Payable account to show the liability to be paid. On the credit side, you would credit the Mileage Expense account to offset the debit and reduce the expense.
So the journal entries for the second transaction would be:
Mileage Expense Dr. $3,500
Allowance for Mileage Expense Cr. $3,500
Reimbursement Payable Dr. $3,500
Mileage Expense Cr. $3,500
When the actual payment is made for the reimbursement, you would debit the Reimbursement Payable account and credit the Cash account.
I hope this helps clarify the correct recording of these transactions. Make sure to consult your textbook or instructor for specific account titles and any additional guidance.