[seaoh]

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 2 and Year 1 balance sheets, respectively. During Year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace’s Year 2 corporate income tax return, what amount should Ace include as rent revenue?

Answer: $65,000. Rent revenue under the accrual basis would include the cash received ($50,000) plus the increase in the rent receivable ($10,000 = $35,000 – 25,000), or $60,000. In addition, the $5,000 nonrefundable rent deposit is additional rent revenue, for a total of $65,000.

I am confused why we are adding the increase in receivables. If we are basing tax on the accrual method, wouldn’t we be subtracting the $25,000 from cash as it would relate to the year 1 receivables? Thanks in advance for any help!!

AUD - 81 (8/15)
BEC - 83 (10/15)
FAR - 84 (1/16)
REG - 79 (5/16)

[Anonymous]

There's two ways you can see this:
$50,000 cash rent + $10,000 increase in receivable + $5,000 deposit = $65,000 rent income

or

$50,000 cash rent – $25,000 beginning receivable + $35,0000 ending receivable + $5,000 deposit = $65,000 rent income

So, if it's easier for you to understand by subtracting the full $25k, you can do that, you just have to then add the full $35k. They did the same thing in essence, they just took the net of ( -25k +35k) by using $10k, instead of putting both numbers in the equation.

[zieg16]

It goes back to T accounts.

Rent Receivable:
$ 25,000 Beginning debit balance
< 50,000> credits to the account from rent payments during the year
? debits to the account, which equal credit sales this year
_________________________________________
$35,000 Ending debit balance

The increase in receivables indicate that you sold more than you received payments for.

Hope that helps!

AUD: 96 (5/12/16)
REG: 6/7/16
FAR: 7/31/16
BEC: 9/2/16

Just trying to do my best - there are more important things in life than an exam score.

[Anonymous]

If open T account for this then it will be more helpful to understand.
rent receivable is a debit balance so opening balance is $25000
during the year you receive (50000+5000) $55000
and ending balance $35000
so Rent revenue is 35000+55000-25000=$65000

[seaoh]

THANKS GUYS!!!!

AUD - 81 (8/15)
BEC - 83 (10/15)
FAR - 84 (1/16)
REG - 79 (5/16)

[Author]

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