Examkin

Question

Difficulty: MediumAccrued and Prepaid Expenses

A business started the year on 1 January 2024 with a prepaid rent balance of ₦15,000. During the year ended 31 December 2024, the total rent paid by cash was ₦120,000, which included ₦18,000 paid in advance for 2025. Additionally, rent of ₦5,000 for December 2024 was owing at the end of the year. What is the amount to be charged as rent expense in the Profit and Loss Account for the year ended 31 December 2024?

  1. ₦122,000Answer
  2. B
    ₦128,000
  3. C
    ₦112,000
  4. D
    ₦118,000

Answer

₦122,000
Under the accrual and matching concepts, expenses recognized in profit and loss must reflect what was incurred for that specific financial year. Starting with cash paid of ₦120,000, adding opening prepayment (₦15,000), deducting closing prepayment (₦18,000), and adding closing accrual (₦5,000) yields ₦122,000.

Step-by-Step Solution

1
Identify total cash paid during the period.
Cash paid = ₦120,000
This is the initial cash outflow for rent recorded in the cash book.
2
Adjust for opening and closing prepayments.
₦120,000 + ₦15,000 (opening prepaid) - ₦18,000 (closing prepaid) = ₦117,000
Opening prepayment relates to the current year and is added, while closing prepayment relates to the next year and is deducted.
3
Adjust for closing accrued expense.
₦117,000 + ₦5,000 (closing accrued) = ₦122,000
Accrued rent incurred during the period must be added to reflect the total expense incurred for the year under the matching concept.

Key Concept

Accruals and Prepayments Matching Principle
Estimated Time:1m 30s
Rate this question

Topics

Accrued and Prepaid Expenses

More questions from this topic