[Mike27]

Becker explains the answer, but I still don’t understand. Please enlighten me. A different perspective of the way to arrive at the correct answer would be appreciated, but even a better explanation of their arrival there would help. Thanks

Company X reported rental revenue of 2,210,000 on its cash basis federal income tax return for the year ended 11/30/2. Additional information is as follows:

Rents Rec 11/30/2 1,060,000

Rents rec 11/30/1 800

Uncollectible rents written off during the year 30,000

Under accrual, what is rental revenue at 11/30/2?

Their solution:

Rents rec at 11/30/1 800,000

Add: Billings accrued 2,500,000

Subtotal 3,300,000

Less; Cash collections (2,210,000)

Write-offs (30,000)

Rents rec at 11/30/2 1,060,000

I don’t even understand where they got “Add: Billings accrued.” Thanks for the help

[make_yourself]

The “Billings Accrued” number is a plug. They're using the BASE account analysis format (it was really useful, in my opinion, it basically got me through FAR).

They give you beginning and ending rent receivable account balance, as well as cash collections for the year, so you have three of four pieces of the equation:

B — 800,000

A — ???

S — (2,210,000)

E — 1,060,000

Since this is a receivable account, in order to get to the correct ending balance you will have to add any revenue booked on an accrual basis, which would have been a debit to the receivables account, and subtract any cash receipts that were credits to the receivable account, so that's what they're doing. Solving the problem is finding the A of BASE.

Also, probably to try and throw you off, they include $30,000 of uncollectible rent for the year. Since this amount is uncollectible, we need to take an extra $30,000 out of the receivables account on top of the cash receipts (under the allowance method, the journal entry would be a debit to “Allowance for Uncollectible Accounts” and a credit to the receivable to take the uncollectible amount out of the receivable balance). The BASE formula then becomes this:

B — 800,000

A — 2,500,000 –> Plug

S — (2,240,000)

E — 1,060,000

Hope this helps!

FAR - 81 (07/24/2012)
BEC - 92 (10/06/2012)
AUD - 92 (11/29/2012)
REG - 88 (02/28/2013)

Ethics - 90

California Licensed CPA - 12/2013

[Anonymous]

You'll have to solve the problem using the B.A.S.E formula. We know that in accrual basis of account:

Beginning: Beginning Receivables

Add: + Sales/ Accrued Sales (which was billed because it was earned)

Subtract: – Cash Payments from the clients (No longer receivables once the clients pay)

Subtract: – Write offs

---

= Ending Receivables

Solve:

Beg: 800,000

Add: 2,500,000 (Increase Receivables because they earned it and so they billed the client/ THIS IS THE RENTAL REVENUE)

= 3,300,000

Minus: Cash collections no longer part of AR, and becomes part of cash (2,210,000)

Minus: Write-offs (30,000)

Rents rec at 11/30/2 1,060,000

Calculation: 1060000 + 30,000 + 2210000 = 3300000

3300000 – 800000 (given to you) = Rental Revenue ACCRUED because earned/Billed to the customer: 2,500,00

[Mike27]

Thanks. I see my mistake.

[Author]

Replies