Introduction:
TechCo, a company that manufactures electronic gadgets, owns a property that it rents out to another company. The rent provides an additional income stream for TechCo. The rent payments are subject to VAT, which TechCo must collect from the tenant.
The Situation:
TechCo rented out its property for one year, from January 1 for a monthly rent of $12,000. The rent is subject to a 10% VAT, which amounted to $1,200 (10% of $12,000). The rent for the month of July was received by TechCo on July 1 (start of monthly rent period). Today is July 31 (end of monthly rent period).
Case Facts:
Monthly rent (before VAT): $12,000
VAT (10%): $1,200
Total rent including VAT received by TechCo on July 1: $13,200
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:
When rent is received by TechCo at the start of the rent period on July 1:
Debit: Cash/Bank for the total amount received from the tenant on July 1.
Credit: Unearned Rent Revenue for the total amount received from the tenant on July 1.
When rent period for the month of July ends on July 31:
Debit: Unearned Rent Revenue for the total amount received from the tenant on July 1.
Credit: Rent Revenue for the rent amount excluding VAT.
Credit: VAT Payable for the VAT amount.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When rent is received by TechCo at the start of the rent period on July 1:
Debit: Cash/Bank for $13,200 (rent amount including VAT received from tenant)
Credit: Unearned Rent Revenue for $13,000 (rent amount including VAT received from tenant)
When rent period for the month of July ends on July 31:
Debit: Unearned Rent Revenue for $13,200 (rent amount including VAT received from tenant)
Credit: Rent Revenue for $12,000 (rent amount excluding VAT)
Credit: VAT Payable for $1,200 (VAT amount)
Explanation:
Cash/Bank (Debit): Reflects the total amount including VAT received by TechCo from the tenant.
Rent Revenue (Credit): Represents the income earned by TechCo at the end of the rent period (July 31) from renting out the property .
Unearned Rent Revenue (Credit): Represents the income not yet earned by TechCo at the start of the rent period (July 1).
Unearned Rent Revenue (Debit): Represents the offsetting, at the end of the rent period (July 31), the unearned income previously recorded by TechCo at the start of the rent period (July 1).
VAT Payable (Credit): Represents the VAT collected from the tenant, which TechCo must pay to the government.
This case study shows how TechCo records its rental income, including the accounting for VAT, at the start and end of each monthly rent period. The journal entries reflect (a) unearned rent revenue at the start of a rent period, (b) earned rent revenueat the end of a rent period, and the VAT that needs to be paid to the tax authorities, 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.
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