[Stuart11]

I saw someone else ask for help with this same question on another posting here:

https://www.another71.com/cpa-exam-forum/topic/far-question-aicpa-help-please-explain

I think I understand the question and answer, but something else about it is frustrating me.

The question is: 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. $60,000

c. $5,000

d. $65,000

According to the explanation, there should be a liability of $5,000 on the first day of Year 2 because the prepaid rent from original rent payment of $25,000 was not sufficient to cover the requisite rent expense, and it spilled over into a “Rent Payable”. My question is, if the second payment of $30,000 is made on the first day of Year 2, shouldn’t that wipe out the “Rent Payable” account? This would leave NO related liability.

For example the JE on January 1, Year 2 would look like this:

DR: Rent Payable………..5,000

DR: Prepaid Rent………..25,000

CR: …………….Cash……….30,000

The only thing I can think of is that the question is asking for the liability BEFORE making the second rent payment. If this is the case, that is super frustrating because there are so many questions that you make the opposite assumption – that adjustments and payments have been made before you determine the balance.

Thanks,

Stuart