On October 1, Goodwell Company rented warehouse space to a tenant for $2,500 per month and received $12,500 for five months' rent in advance on that date. The collection was credited to the Unearned Rent account. The company's annual accounting period ends on December 31. The Rent Revenue account balance at the end of December, after adjustment, should be:
A)$5,000.
B)$7,500.
C)$12,500.
D)$2,500.
E)$10,000.

Question

Quizplus · Accepted Answer

When rent is received in advance, it is recorded as a liability in the Unearned Rent account. As per accrual accounting principles, this liability must be recognized as revenue over the period it covers. In this case, the company received $12,500 for five months' rent in advance, so the monthly rent is $2,500 ($12,500/5). 
From October 1 to December 31, 3 months of the 5-month rent period have passed. Therefore, Goodwell Company would have earned rent revenue of $7,500 ($2,500 per month x 3 months) during this period. The remaining $5,000 ($12,500 - $7,500) is still unearned and should remain in the Unearned Rent account. 
After adjusting the Rent Revenue account and recognizing the rent earned in the period from October 1 to December 31, the balance of Rent Revenue account will be $7,500.

On October 1, Goodwell Company Rented Warehouse Space to a Tenant