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    The question I have is:

    (The financial year starts 1/7/20X5)

    The only lease payments made relate to factory premises. This operating lease, which is payable in advance, runs from 1 January to 31 December. The full lease payment for the year of £1,200,000 was made on 31 December 20X5 and debited to cost of sales (with appropriate reversal at that time of the previous year’s prepayment of £500,000). The year-end prepayment has yet to be accounted for.

    What I'm thinking is:

    The prepayment was made half-way through the year so only half of the prepayment should be accounted for in this current financial year

    500 of the prepayment was reversal from the previous year so:

    1200-500 / 2 = 350 should be taken off and used for the following year

    CR prepayments 350
    DR cost of sales 350



    Am I completely wrong or is this ok? Please help
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    Had a go at it, as in the above post not sure whether it's correct?
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    (Original post by DatDerDerp)
    The question I have is:

    (The financial year starts 1/7/20X5)

    The only lease payments made relate to factory premises. This operating lease, which is payable in advance, runs from 1 January to 31 December. The full lease payment for the year of £1,200,000 was made on 31 December 20X5 and debited to cost of sales (with appropriate reversal at that time of the previous year’s prepayment of £500,000). The year-end prepayment has yet to be accounted for.

    What I'm thinking is:

    The prepayment was made half-way through the year so only half of the prepayment should be accounted for in this current financial year

    500 of the prepayment was reversal from the previous year so:

    1200-500 / 2 = 350 should be taken off and used for the following year

    CR prepayments 350
    DR cost of sales 350



    Am I completely wrong or is this ok? Please help
    The T account would show this:
    ________________________________ ____________________
    Prepayment B/fwd......500,000...| Prepayment c/fwd*...600,000
    'Paid in year............1,200,000...| To P&L.................1,100,000
    ...........................===== ====............................ ...========
    '.............................1, 700,000......................... ........1,700,000

    * Year end is 30 June X6 and the payment for £1.2m was made on 31 Dec X5, coving 12 months. So 6 months of the payment are within the year and 6 months are covering the months after...

    So you want to remove 6 months of the payment from the rent account because it is not relevant to this year. This is £1,200,000 x 6 (months) / 12 (months) = £600,000 prepayment.

    So you would Dr Prepayments with £600,000 and Cr Rent Account (Not CoS) £600,000
 
 
 
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