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rkwc
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Joined: 20 Feb 2016
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Posts: 1
Posted: 20 Feb 2016 at 12:59 | IP Logged  

Question CPA-00613

Kemp Co. must determine the December 31, Year 1, year-
end accruals for advertising and rent expenses. A $500
advertising bill was received January 7, Year 2,
comprising costs of $375 for advertisements in
December Year 1 issues, and $125 for advertisements in
January Year 2 issues of the newspaper.

A store lease, effective December 16, Year 0, calls
for fixed rent of $1,200 per month, payable one month
from the effective date and monthly thereafter. In
addition, rent equal to 5% of net sales over $300,000
per calendar year is payable on January 31 of the
following year. Net sales for Year 1 were $550,000.

In its December 31, Year 1, balance sheet, Kemp should
report accrued liabilities of:

a.$12,875
b.$13,000
c.$13,100
d.$13,475

Explanation
Choice "d" is correct. $13,475 accrued liabilities at
12/31/ Year 1.

Advertising for December Year 1 issues     375.00
($125 for Jan. Year 2 issues pertain to Year 2)
Store lease fixed rent ($1,200 x 1/2 month)     600.00
Actual net sales     550,000.00
Less base sales     (300,000.00)
Excess     250,000.00
Percentage     x 5%
Percentage rent     12,500.00
Total     13,475.00

It might be a stupid question but I just don't
understand why they didn't record the monthly rent
payable after January. I get that I divide $1,200 into
a half for January part because the other half is for
December, but I don't get why they never record the
months after.

What about the rest of the months after January and
before December in Year 1? It says it is payable
monthly thereafter so don't I need to add $1,200 x 11
months(Feb. 16 - Dec. 16)= 13,200?

Please help me figure this out.

Thank you in advance!
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nambivar
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Joined: 14 Nov 2010
Location: United States
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Posted: 25 Feb 2016 at 22:20 | IP Logged  

rkwc: We are aware that accruals are adjustments for expenses that have been incurred but are not yet recorded in the accounts and these accruals need to be added via adjusting entries so that the financial statements report these amounts. The rental expenses from January 16th of year 1 to December 15th would have been paid by debiting rent expense and paying the landlord by check etc.; so, at the time of finalising accounts for year 1, we need to debit rent expense with 600 for the period from December 16 to 31 of that year and credit outstanding liabilities [for store rent];this helps us in finalising the rent account for that year 1; In year 2, on Jan 16th, outstanding liabilities account would be debited with that 600, rent expense debited with 600 and check issued to landlord for 1200; Hope this clarifies.
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