[Anonymous]

I don’t get why 2 months will be rent payable/(accrued?) in the last 2 months?

A company enters into a three-year operating lease agreement effective January 1, year 1. The amounts due on the first day of each year are $25,000 in year 1, $30,000 in year 2, and $35,000 in year 3. What amount, if any, is the related liability on the first day of year 2?

a. $0

b. $5,000

c. $60,000

d. $65,000

Solution:

Choice “b” is correct. Operating lease expense must be recorded equally over the life of the lease. The average annual lease amount is $30,000 per year, or $2,500 per month. In year 1, the lease would be accounted for as follows:

Beginning of Year 1:

Prepaid rent 25,000

Cash 25,000

Monthly AJE’s for first 10 months:

Rent Expense 2,500

Prepaid rent 2,500

Monthly AJE’s for final 2 months:

Rent Expense 2,500

Rent payable 2,500

After recording monthly AJE’s for both November and December, our rent payable is $5,000 by 1/1/Y2

[momto5]

By the 10th month you used up all your prepaid rent balance. You only had $25,000 in there. The last two months become a payable. The expense had to be recorded equally, so annual expense was actually $30,000 even though you only had to pay out $25,000 the first year. Does that help, or still fuzzy?

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Anonymous]

Thank you!!!

[OUCPA84]

I don't get it, where in the problem does it say that monthly payments have to be an even $2,500?

Anyone have a more detailed response? Thanks

AUD Pass
REG Fail, Rematch TBA
FAR 11/26 Certain I failed
BEC ?

Becker

[momto5]

The problem doesn't necessarily spell that out. You need to know that, as the answer explains, “Operating lease expense must be recorded equally over the life of the lease.” Therefore, $90,000 total divided by 36 months (3 years) = $2500/month.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[OUCPA84]

O boy, i missed the boat on that one.

Thanks for your help!

Also, I'm using Becker so should i be watching the video lectures then doing the MCQ's and learn that way?

Or

Videos, re-write highlights of lecture for notes, then do questions?

Any learning tips are appreciated. Thx!

AUD Pass
REG Fail, Rematch TBA
FAR 11/26 Certain I failed
BEC ?

Becker

[momto5]

Well, everyone is different in their methods. I am on my 4th exam and still am working on the BEST way for me to do this. I usually have gone through the lecture and followed by doing the MCQ's for that section, then the next lecture, etc. Once I finished the chapter I went back and took separate notes and made flashcards. That takes a long time, but for me it helps solidify concepts in my brain a bit. I tried to take a progress test after each chapter (which combines questions from all previous chapters) and tried to keep up reviewing flashcards but usually ran out of time to get it all in.

Now I am doing REG and going through lectures, then writing all my notes on flashcards for each section as I finish it, then doing the MCQ's for that section (or sometimes I do the questions first and notes after), and on to the next section. Still trying to do progress tests after each chapter and trying to keep up with flashcards, although I anticipate I will use those more during my review stage.

Some people watch all videos first and don't bother doing any questions until they have listened to the whole set of lectures. I personally like to reinforce what I am learning as I go, even though I may forget it and have to go over it again at the end. By that time I am seeing it a second and third time already instead of just the first time. But there again, everyone learns differently and has different preferences. Notes and flashcards are key for me because I am a visual and kinesthetic learner, so writing it out myself helps me tremendously. Good luck!

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Author]

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