Channy has prepared her draft financial statements for the year ended 30 April 20X7, and needs to adjust them for the following items:
1. Rent of $2,625 was paid and recorded on 2 January 20X6 for the period 1 January to 31 December 20X6. The landlord has advised that the annual rent for 20X7 will be $3,000 although it has not been invoiced or paid yet.
2. Property and contents insurance is paid annually on 1 March. Channy paid and recorded $1,500 on 1 March 20X7 for the year from 1 March 20X7 to 28 February 20X8.
What should the net effect on profit be in the draft financial statements for the year ended 30 April 20X7 of adjusting for the above items?
Answer
| $ | |
| Rent accrual ($3,000 x 4/12) | (1,000) |
| Insurance prepayment ($1,500 x 10/12 ) | 1,250 |
| Net increase in profit | 250 |
Journal Entry on 1 March 20X7
Dr. Insurance Expense…………1,500
Cr. Cash……………………………………1,500
Adjusting Entry on 30 April 20X7
Dr. Prepayment ………………..1,250
Cr. Insurance Expense…………………….1,250