Assume that Yosuke wants to rent a room at a Lakeview apartment,the landlord requires a one-time,non-refundable $50 application fee and a contract cancelable with 5 days notice,charges $500 per month to rent the apartment for the next 12 months.How are the $50 application fee and the $500 monthly rental accounted for under U.S.GAAP or under IFRS?
A)Under U.S.GAAP,the $50 payment is recognized as revenue immediately,while the $500 payment is recorded as revenue each month.
B)Under U.S.GAAP,the $50 payment is recorded as unearned revenue and allocated over a reasonable future period.The $500 payment is recorded as revenue each month.
C)Under IFRS,the $50 payment is recorded as unearned revenue and allocated over a reasonable future period.The $500 payment is recorded as revenue each month.
D)None of the above.

Question

Quizplus · Accepted Answer

Under U.S. GAAP, the $50 payment is recognized as unearned revenue and allocated over a reasonable future period. The $500 payment is recorded as revenue each month. This is because the application fee does not represent revenue earned by the landlord at the time of payment, but rather represents a deposit towards the potential rental agreement. Therefore, it is initially recorded as unearned revenue and recognized over the period that the rental agreement is in effect. The monthly rental payments represent revenue earned by the landlord during that month and are recognized as revenue in that period. This treatment is consistent with the matching principle in accounting, which requires that expenses be matched with the revenue they help to generate. Under IFRS, the treatment would be similar to that under U.S. GAAP, so option C would also be a valid choice.

Assume That Yosuke Wants to Rent a Room at a Lakeview