Each year, the 'Kappa Delta Phi' sorority pays a whole year's rent for their chapter house in advance on 1 September. Their payments for 20X1 and 20X2 are as follows: 1 September, 20X1: $ 25,000, and 1 September, 20X2: $ 26,000. What rent expense will be on their 20X2 income statement?
A) $ 25,250
B) $ 25,333
C) $ 25,500
D) $ 26,000

Question

Quizplus · Accepted Answer

The rent expense for 20X2 is calculated by taking the average of the two payments: ($25,000 for 20X1 + $26,000 for 20X2) / 2 = $25,500. However, since the rent for 20X1 is paid in advance, it covers the period from 1 September 20X1 to 31 August 20X2. Therefore, the rent expense for 20X2 should include the four months of 20X1's rent that apply to 20X2 (September to December) and the eight months of 20X2's rent that apply within the same year. The correct calculation divides the year proportionally based on the payment amounts and their applicable periods, leading to the correct answer of $25,333, which accounts for the proportional monthly expenses across the two payment periods.

Each Year, the 'Kappa Delta Phi' Sorority Pays a Whole