On July 1, 2021, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What would be the amount of rent expense in the 2022 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting?

Cash basis $0

Accrual basis $24,000

Explanation:

Under the cash basis accounting method, expense are recognized once cash is paid. Even when the cash was prepaid, the expense will be recognized in the period the cash was paid as though it has been incurred.

In the accrual method of accounting, the expense is only recognized when it has been incurred. This is what gives rise to prepaid expenses and accrued liabilities.

As such rent expense in 2022;

cash basis

= 0 (the amount paid would have been expensed in the year paid 2021)

Under accrual basis

= 12/36 × $72,000

= $24,000

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