Accounting Made Simple 14

Question 1

1. The goal of the ACCRUAL METHOD is to:

Answer 1

record the revenues or expenses in the period during which the real ECONOMIC TRANSACTION occurs, as opposed to the period in which cash is exchanged.

Question 2

2. Checklist Construciton pays 1,500 monthly rent, but it must be prepaid three months in advance. On April 1, a check is written for 4,500 (April, May, June), the entry is:

Answer 2

Prepaid Rent…..4500

Cash……………..4500

Question 3

3. What type of entry is PREPAID RENT?

Answer 3

It is an ASSET ACCOUNT.

Question 4

4. Over the course of three months, the 4,500 prepaid rent will be eliminated as the EXPENSE is recorded.
   ASSETS CAUSED by the prepayment of an EXPENSE are known as:

Answer 4

PREPAID EXPENSE ACCOUNTS.

Question 5

5. Then, at the end of every month, Checklist Construction makes the following entry to reflect the status of prepaid rent:

Answer 5

Rent Expense…..1500

Prepaid Rent……..1500

Question 6

6. So, at the end of the three months, prepaid rent will be:

Answer 6

back to zero, and the company will have recognized the proper amount of RENT EXPENSE each month.

Question 7

7. From Checklist Construction’s perspective, the early rent payment created an ASSET ACCOUNT ( Prepaid Rent ). From the Landlord’s perspective, the early payment creates:

Answer 7

a LIABILITY ACCOUNT knowns as “UNEARNED REVENUE.”

Question 8

8. On April 1st, Landlord receives the 4,500 check for prepaid rent, and they:

Answer 8

set up a UNEARNED RENT LIABILITY ACCOUNT.

Question 9

9. On April 1st, Landlord receives the check and makes the following entry:

Answer 9

Cash……4500
Unearned Rent…..4500

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Question 10

10. Then, at the end of each month, Landlord records the revenue by making the following entry:

Answer 10

Unearned Rent…….1500
Rental Income………1500