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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 $24,000 until 30 June 20X5 and rose to $30,000 per year from 1 July 20X5. The year end is 31 December 20X5. What is the rent expense for the year ended 31 December 20X5?

The rent expense is $27,000. The first six months are charged at $24,000 per year, giving $12,000, and the last six months at $30,000 per year, giving $15,000. Applying the new rate to the whole year would overstate the expense.

  1. A$27,000Correct
  2. B$30,000
  3. C$24,000
  4. D$28,500

Explanation

Six months at $24,000 per year = $12,000; six months at $30,000 per year = $15,000. Total expense is $27,000. $30,000 wrongly applies the new rate to the full year. Since the payments cover exactly each quarter, no prepayment arises at 31 December.

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