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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Dara Co has a year end of 31 December. It pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual rent was $12,000 until 30 June 20X5 and then increased to $15,600 per year. What is the rent expense for the year ended 31 December 20X5?

The rent expense is $13,800. Six months at the old rate of $12,000 a year gives $6,000, and six months at the new rate of $15,600 a year gives $7,800. The expense follows the period of use, not the full-year new rate.

  1. A$13,800Correct
  2. B$14,400
  3. C$12,000
  4. D$15,600

Explanation

January to June: $12,000 x 6/12 = $6,000. July to December: $15,600 x 6/12 = $7,800. Total = $13,800. Using $15,600 for the whole year ignores that the increase applied only from July; the cash-paid figure ($3,000+$3,000+$3,900+$3,900 = $13,800) agrees.

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