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

Marlow Co 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 rose to $18,000 per year from 1 July 20X5. The year end is 31 December 20X5. What is the rent expense for the year and the prepayment at the year end?

The rent expense is $15,000, being six months at the old rate and six months at the new rate. There is no prepayment because the last quarterly payment on 1 October covers up to 31 December, the year end.

  1. AExpense $15,000; prepayment $4,500
  2. BExpense $15,000; prepayment $0Correct
  3. CExpense $18,000; prepayment $4,500
  4. DExpense $15,000; prepayment $3,000

Explanation

Expense = 6/12 x $12,000 + 6/12 x $18,000 = $6,000 + $9,000 = $15,000. The 1 October payment covers October to December, all within the year, so no prepayment exists. Option A wrongly assumes a quarter is prepaid.

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