CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions
Arun Enterprises follows the mercantile system. Rent paid during the year was Rs 1,20,000, which included Rs 20,000 paid in advance for the next year. Rent of Rs 10,000 for the last month of this year remained unpaid. What rent expense is charged to the profit and loss account for the year?
Under the mercantile system, rent expense is cash paid, less the prepaid portion, plus the outstanding amount. That is 1,20,000 minus 20,000 plus 10,000, giving Rs 1,10,000 charged to profit and loss for the year.
- ARs 1,10,000Correct
- BRs 1,20,000
- CRs 1,30,000
- DRs 1,50,000
Explanation
Expense on accrual basis = paid 1,20,000 - prepaid 20,000 + outstanding 10,000 = 1,10,000. Rs 1,30,000 results from the sign error of adding the prepaid and deducting the outstanding amount.
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