PROFITIZE Case Study: How TechCo Recorded Rent Expense

Introduction:

TechCo, a company that manufactures electronic gadgets, rents a building where they conduct their business operations. The rent is an essential expense that allows TechCo to have a space for its offices and equipment, but it’s considered an indirect expense because it doesn’t directly produce goods.

The Situation:

TechCo rented a property for one year, from January 1 for a monthly rent of $10,000. The rent is subject to a 10% VAT, which amounted to $1,000 (10% of $10,000). The rent for the month of July was paid in full by TechCo on July 1 (start of monthly rent period). Today is July 31 (end of monthly rent period).

Case Facts:

• July rent (before VAT): $10,000

• VAT (10%): $1,000

• Total rent, including VAT, paid by TechCo on July 1: $11,000

IFRS Journal Entries:

Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards) on July 1 (start of monthly rent period) and July 31 (end of monthly rent period). TechCo needs to make the following journal entries:

1. When rent is paid by TechCo at the start of the rent period on July 1:

Debit: Prepaid Rent for the rent amount including VAT.

Credit: Cash/Bank for the rent amount including VAT.

1. When rent period for the month of July ends on July 31:

Debit: Rent Expense for the rent amount excluding VAT.

Debit: VAT Receivable for the VAT amount.

Credit: Prepaid Rent for the rent amount including VAT.

Can You Figure Out the IFRS Journal Entries?

Based on the information provided:

1. When When the rent is paid by TechCo at the start of the rent period on July 1:

Debit: Prepaid Rent for $11,000 (rent amount including VAT)

Credit: Cash/Bank for $11,000 (rent amount including VAT)

1. When the rent period for the month of July ends on July 31:

Debit: Rent Expense for $10,000 (rent amount excluding VAT)

Debit: VAT Receivable for $1,000 (VAT amount)

Credit: Prepaid Rent for $11,000 (rent amount including VAT)

Explanation:

• Rent Expense (Debit): Reflects the cost of renting the property for the period (in this case, the month of July).

• VAT Receivable (Debit): Represents the VAT that TechCo can reclaim from the government.

• Cash/Bank (Credit): Decreases as TechCo pays the rent, including the VAT.

This case study shows how TechCo records the payment of rent when (a) it pays the rent (July 1) and (b) the rent period ends (July 31). The journal entries reflect the expense incurred for rent and the handling of VAT, ensuring that all aspects of the transaction are accurately recorded in TechCo’s financial records.

Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.