Question

On July 1, Year 1, a company paid $48,000 for 24 months of advance rent on its warehouse. Assuming the company has a December year end, what would be the amount of rent expense in Year 1 under cash basis versus accrual accounting?a. Cash basis = $24,000; Accrual = $24,000.b. Cash basis = $48,000; Accrual = $12,000.c. Cash basis = $12,000; Accrual = $36,000.d. Cash basis = $48,000; Accrual = $24,000.

Answer 1

Answer:

b. Cash basis = $48,000; Accrual = $12,000

Explanation:

Under the cash basis, the whole amount that is received should be reported i.e. $48,000      

While in the accrual basis, the amount which is actually received in a current financial year should be recorded

Since $48,000 is for 24 months

So for one month, it would be

= $48,000 ÷ 24 months

= $2,000

And, from July 1  to December 31, it have 6 months

So, the total amount is

= $2,000 × 6 months

= $12,000