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

Tamsin Co's year end is 30 June 20X6. On 1 October 20X5 it received $9,000 for 15 months' sublease income covering 1 October 20X5 to 31 December 20X6, and credited it all to rental income. No other entries were made. What adjustment is needed at 30 June 20X6?

Debit rental income and credit deferred income with $3,600. The receipt covers 15 months at $600 a month, and six months fall after the year end, so $3,600 is unearned. It is a liability at 30 June 20X6, with $5,400 remaining as income.

  1. ADebit rental income $3,600 and credit deferred income $3,600Correct
  2. BDebit rental income $5,400 and credit deferred income $5,400
  3. CDebit deferred income $3,600 and credit rental income $3,600
  4. DDebit rental income $2,400 and credit deferred income $2,400

Explanation

Monthly income = 9,000/15 = $600. Months from 1 July 20X6 to 31 December 20X6 = 6, so deferred income = 6 x 600 = $3,600 and income earned to 30 June is $5,400. Since the full $9,000 was credited, rental income must be debited $3,600 with deferred income credited. $5,400 is the earned portion, not the unearned one.

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