Question

Fragmental Co. leased a portion of its store to another company for eight months beginning on October 1, at a monthly rate of $1,025. Fragmental collected the entire $8,200 cash on October 1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the adjusting entry made by Fragmental Co. on December 31 would be:

a)A debit to Cash and a credit to Rent Revenue for $8.200.
b)A debit to Unearned Rent and a credit to Rent Revenue for $5,125.
c)A debit to Rent Revenue and a credit to Unearned Rent for $3,075.

Answer 1

The correct adjusting entry on December 31 for Fragmental Co. is a debit to Unearned Rent and a credit to Rent Revenue for $3,075, representing three months of earned rental income.

Step-by-step explanation:

The adjusting entry made by Fragmental Co. on December 31 would be a debit to Unearned Rent and a credit to Rent Revenue for the amount of rent that has been earned during the year. As the lease began on October 1 and the rent is $1,025 per month, for three months (October, November, December), the earned amount would be $3,075.

Therefore, the correct adjusting entry on December 31 would be a debit to Unearned Rent and a credit to Rent Revenue for $3,075. This reflects the revenue recognition principle, which states that revenue should be recognized in the accounting period in which it is earned.