Ultra Realty received a cheque for $21,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Ultra Realty should make the following adjusting entry on July 31:

Question

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Since the rental revenue was credited for the full amount of $21,000, it means that it was recorded as unearned because it was received in advance. At the end of the period (July 31), a portion of that amount would be earned (for the month of July). Therefore, an adjusting entry should be made to recognize the portion that was earned. Based on the information given, the rent was prepaid for a total of 6 months, which means that the monthly rent is $3,500 (=$21,000/6). Therefore, the adjusting entry should debit Unearned Rental Revenue (a liability account) for $3,500 and credit Rental Revenue (an income account) for $3,500. The entry should be made on July 31 to recognize the revenue earned for the month of July.

Ultra Realty Received a Cheque for $21,000 on July 1