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

Kestrel Co receives a rent payment of $9,000 in advance on 1 November for a sublet property covering the six months to 30 April. Kestrel's year end is 31 December. What amount of the receipt is deferred income at 31 December, and how is it presented?

Rent of $9,000 covers six months at $1,500 a month. Two months are earned by 31 December, leaving four months, $6,000, received in advance. This is deferred income, a current liability, because Kestrel still owes the occupier the use of the property.

  1. A$3,000 as a current liabilityCorrect
  2. B$6,000 as a current liability
  3. C$6,000 as a current asset
  4. D$3,000 as a current asset

Explanation

Six months covers $9,000, so $1,500 per month. Two months (Nov, Dec) are earned = $3,000; four months (Jan-Apr) are unearned = $6,000. Wait: the unearned part is $6,000, so the correct figure must be $6,000 as a liability. Correcting: deferred income is $6,000 shown as a current liability.

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