Fragmental Co.leased a portion of its store to another company for eight months beginning on October 1,at a monthly rate of $800.Fragmental collected the entire $6,400 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 Rent Revenue and a credit to Cash for $2,400.
B)A debit to Rent Revenue and a credit to Unearned Rent for $2,400.
C)A debit to Cash and a credit to Rent Revenue for $6,400.
D)A debit to Unearned Rent and a credit to Rent Revenue for $2,400.
E)A debit to Unearned Rent and a credit to Rent Revenue for $4,000.

Question

Quizplus · Accepted Answer

Since adjusting entries are only made at year-end, an adjusting entry needs to be made as of December 31.

The $6,400 cash received on October 1 was recorded as unearned revenue. As of December 31, two months have passed (November and December). Therefore, Fragmental Co. has earned 2 months of the rent and needs to account for it.

The adjusting entry on December 31 would be to debit Unearned Rent for $2,400 (2 months at $800 per month) and credit Rent Revenue for $2,400. The entry reduces the liability of unearned rent and recognizes the revenue earned.

Therefore, the correct answer is option D.