[CPApracticer]

I am going to shorten the question to the part that I am confused with.

CPA-00613: “Kemp must determine the December 31, Year 1 year-end accruals for rent expense. A store lease, effective December 16, Year 0 calls for fixed rent of $1200 per month, payable one month from the effective date and monthly thereafter.”

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

Answer: Store lease fixed rent ($1,200 x 1/2 month) = $600

My question: Why is it taking away $600. Shouldn’t it be taking away $1200 on Jan 16, Year 1. And the 11 months after that? So shouldn’t accrued liabilities be $12000 for December 31 Year 1?

I might be reading this question wrong or I might have a misunderstanding of what accrued liabilities are.

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[Anonymous]

There doesn't seem to be a mistake here. Under US GAAP, liabilities are expensed when incurred. Since the effective date started half the month in, the total amount incurred for that period should be the monthly rate (1200) multiplied by the time in effect (50%) to get $600

Journal entry at 12/31 should be:

debit accrued expense for 600 and credit rent payable

on 1/16 the entry should be:

debit expense 600, payable 600 and credit cash 1200

[CPApracticer]

But what about all the monthly $1200 payments that would have to be made from the effective date December 16, Y0 to December 31, Y1. The question asks for accrued liabilities to be reported on Dec 31, Y1, so shouldnt we add the payments from February Y1 to December Y1?

@CPjAson: The answer would make sense if the effective date was December 16, YEAR 1 instead of YEAR 0

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[Anonymous]

Ohhhhh I get what you are asking now. ACCRUED liabilities mean liabilities that have not yet been PAID. So after the 16th of each month, the amount of the accrued liabilities would go back down to 0 because they would have been paid. If the question had instead asked for the amount of EXPENSE for the year ended 12/31/x1 then you would add them all. Hope this helps!

[CPApracticer]

@CPjAson: wait so, the $1200 payable on January 16, Year 1 has not been paid yet by December 31, Year 1??

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[Anonymous]

eh….try re-reading my answer and understanding it. I'm not tryna be an ass, but this is one of the most basic problems you will encounter.

[foreverstudying]

@CPApracticer $1200 was paid January 16, February 16, March 16… December 16 Year 1. Since the next payment will be made January 16 Year 2, the company must record an accrued liability of $600 to account for December 17-31 at the end of the month. hope that helps you understand the answer a little better, but still look back at cpjason's first post for the journal entry and reread his explanation of accrued vs. expensed

FAR - 70, 83
REG - 82
BEC - 78
AUD - 76

[acamp]

You're mixing up an accrued liability and a capital lease.

For a capital lease an asset would be put on the books and a liability representing lease payments would be on there, review the capital lease requirements and you'll see this doesn't quality and/or they purposely left out criteria that would be needed to determine if it is capital–so for buildings its safe to assume its an operating lease.

Operating lease = No liability on the books representing the all the lease payments.

Therefore, what needs to be on the books at 12/31 is the amount of rent “used” during that month, but not yet paid as shown in CPjason's first response.

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[CPApracticer]

OHH I get it now! the accrued liability of 600 was for what was not paid for from Dec 17-31 of Year 1!!! I kept thinking it was referring to year 0. thanks, you guys are awesome!!

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[Anonymous]

From what I remember from my schooling days, you accrue and expense the 600 in January the new year. The rent will cover the period through the 1 to the 15. While the other 600 is expensed (not accrued) in December the previous year for the period through the 16 to the 31.

[thehip41]

The amount paid all year is rent EXPENSE

It's not asking for the expense. It's asking for the Accrued part.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Author]

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