[evancole]

Becker question: Why is store lease fixed rent only accounted for 1/2 a month in this calc? Any help would be appreciated.

Question CPA-00613

Kemp Co. must determine the December 31, Year 1, year-end accruals for advertising and rent expenses. A $500 advertising bill was received January 7, Year 2, comprising costs of $375 for advertisements in December Year 1 issues, and $125 for advertisements in January Year 2 issues of the newspaper.

A store lease, effective December 16, Year 0, calls for fixed rent of $1,200 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over $300,000 per calendar year is payable on January 31 of the following year. Net sales for Year 1 were $550,000.

In its December 31, Year 1, balance sheet, Kemp should report accrued liabilities of:

a.$12,875
b.$13,000
c.$13,100
d.$13,475

Explanation
Choice “d” is correct. $13,475 accrued liabilities at 12/31/ Year 1.

Advertising for December Year 1 issues 375.00
($125 for Jan. Year 2 issues pertain to Year 2)
Store lease fixed rent ($1,200 x 1/2 month) 600.00
Actual net sales 550,000.00
Less base sales (300,000.00)
Excess 250,000.00
Percentage x 5%
Percentage rent 12,500.00
Total 13,475.00

 

 

[evancole]

Ahh! Nevermind..What a stupid mistake I made!!

[Anonymous]

I have the same question. Why only half of one month? I think from 12/16 to 12/31 year 0 should be recorded in year 0, and 1/1 to 1/31 Y1 should be recorded $1200 in Y1, no need to half of the month. Can someone tell me why I am wrong?

[Sandy]

Because the accrued expense is only for half month.
Accrured liability is related to the accrued expense.
So if the accrured expense for year one rent is from Dec 16 to Dec 31, the accrued liability is only for half month.

[Anonymous]

This might be a long stupid question, but why don't we multiply $1,200/month by 12 months since the rent covers a period of 1 month and almost 12 months has passed from 12/16/Year0 to 12/31/year1?

Is it because during 1/16/year1 to 12/16/year1 they would've already paid all off all of the Rent Payable that accrued during that period?

And then do we only record the rent that's for 12/16/year 1 to 12/31/year1 b/c we're focusing only on year 1 and that rent isn't due until 1/16/year2? I hope that made sense.

[Author]

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