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

Orchid Co, with a 31 March year end, paid $18,000 on 1 December 20X4 for an annual advertising contract running 12 months from that date. It also paid $7,200 on 1 February 20X5 for a trade fair held on 15 May 20X5. Only the contract is a service received over time. What total prepayment should be recognised at 31 March 20X5?

The total prepayment is $19,200. Eight months of the $18,000 advertising contract remain unexpired, giving $12,000, and the whole $7,200 trade fair payment relates to an event after the year end. Together these are carried forward as a current asset.

  1. A$19,200Correct
  2. B$7,200
  3. C$12,000
  4. D$13,500

Explanation

Contract: 8 months remain (April to November 20X5), so $18,000 x 8/12 = $12,000. The trade fair benefit occurs after the year end, so the full $7,200 is a prepayment. Total is $19,200. $12,000 omits the fair; $13,500 wrongly uses 9 months for the contract.

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