a business leases a building for one year starting 1 october 2003. The rent is $24000 per year and business paid cash one year in advance on 1 october 2003. on dec. 31 2003 how much of that payment should be recorded as a rental expense and how much should be deferred?
To determine how much of the payment should be recorded as a rental expense and how much should be deferred, we need to consider the time period covered by the payment.
In this case, the business leased the building for one year starting on October 1, 2003. Based on this information, we can calculate the time period that falls within the accounting period ending December 31, 2003.
The accounting period ending on December 31, 2003, covers a total of 3 months (October, November, and December). Since the business paid the rent in advance for a one-year period, we need to figure out what portion of the payment falls within these 3 months.
First, we need to determine the monthly rental expense:
$24000 (annual rent) / 12 (months) = $2000 per month
Next, we calculate the portion of the payment that corresponds to the 3-month period:
$2000 (monthly rental expense) x 3 (months) = $6000
Therefore, $6000 should be recorded as rental expense for the accounting period ending December 31, 2003. The remaining portion of the payment, which is $18000 ($24000 - $6000), should be deferred and recorded as a prepaid expense or a liability until it is recognized as an expense in the following accounting periods.