[Wanna_B_TXCPA2014]

NINJA Question –

What clue did I miss that this was a cash to accrual conversion calculation?

1593 Category: 2K Revenue Recognition

Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara’s balance sheets contained the following data:

Year 1 Year 2

Rentals receivable $9,600 $12,400

Unearned rentals 32,000 24,000

During Year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for Year 2?

[Anonymous]

This is a very very very basic question. I would be worried if I were you if you couldn't think of its logic.

You basically apply the BASE formula (Becker).

Beg. rent rec. 9600

Revenue 82800 (squeeeeeez)

subtract: cash received <80000>

End. rent rec. 12400

[Missy]

It's not a cash to accrual conversion. But here's a big clue if you're looking for one, a cash basis business has no receivables or unearned rentals on its balance sheet.

It is and always was an accrual basis question, its just that you have to calculate something knowing 2 balance sheet accounts and the cash received from customers.

Another85, the question is a bit more complex than you think, you did not account for the decrease in unearned rentals. That $12k difference had to go somewhere, and that somewhere would be revenue.So revenue would be the difference in AR plus cash received plus the difference in unearned rents, or 94,800.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Wanna_B_TXCPA2014]

@another 85 Not really sure how what you have provided gets to the correct answer of :

This is a case of converting from cash-basis rent revenue to accrual-basis revenue. Rent received in cash plus the increase in rental receivables, plus the decrease in unearned rent would be rent revenue on an accrual basis. (Cash plus increase in assets and decreases in related liabilities is revenue.)

Thus, the revenue for the year is $80,000 cash received, plus the increase in receivables of $2,800 (from $9,600 to $12,400), adding the decrease in unearned rent of $8,000 (down from $32,000 to $24,000), which adds up to $90,800:

•$80,000 + $2,800 + $8,000 = $90,800

[Anonymous]

I got 90800, try using T accounts, it's very helpful

[Anonymous]

@ mla11692

You are completely right!! I read it quickly, and didn't really think.

@Wanna_B_TXCPA2014

Yes, the answer you provided is correct, but always apply the BASE formula. Don't try to figure out stuff without a t account or BASE formula.

[Missy]

Sorry I misread and thought the unearned rents went from 34k to 22k not 32 to 24, mea culpa!

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

god I miss financial accounting

[Wanna_B_TXCPA2014]

@another85 I dont use Becker to study. Like @anjanja I used T accts and then made a math error. Because the problem didnt mention cash to accrual, I was confused when I saw it in the explaination of the answer. I was asking to determine if I was reading the problem incorrectly or missing a key word that would signal me to think cash to accrual conversion.

[Author]

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