how would i answer this question: Easy rentals ltd received 4 months rent in adv

Question

how would i answer this question:

Easy rentals ltd received 4 months rent in advance from tenants on 1 april 2015. the entire amount of $6400 was credited to the unearned revenue account at this date. ignore GST

a. give the adjusting entry at 30june 2015

b. what amount (if any) should be reported in the balance sheet at 30 june 2015?

c. if no adjusting entry were made on 30 june, by how much would profit be overstated or understated? would liabilities be overstated or understated? explain

d. what would your adjusting entry be in requirement A if the amount of $6400 had been credited to rental revenue on april 1st 2015?

Explanation / Answer

Answer a - Rent advance for four months - $6400. Rent collected for each month - $6400/4 = $1600

On April 1, 2015 –

This should be added to Cash on the Asset side and Unearned income on liability side

On June 30, 2015 –

Rent for 3 months = 3*$1600 = $4800

In the income statement – $4800 needs to be added as Rental income

In the Balance Sheet – On the asset side, Cash should be adjusted to effect the change = $6400 - $4800 = $1600. Similarly on the Liability side, Unearned income should be adjusted to effect the change = $6400 - $4800 = $1600

Answer b –

In the Balance Sheet – On the asset side, Cash should be adjusted to effect the change = $6400 - $4800 = $1600. Similarly on the Liability side, Unearned income should be adjusted to effect the change = $6400 - $4800 = $1600

Answer c –

Profit would be understated by $4800

Liability would be overstated by $4800

Answer d –

Unearned income account would be credited with $1600

Rental revenue account would be debited with $1600

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