[Anonymous]

I’m not quite understanding a problem in the Becker book regarding operating leases and free/reduced rent.

Say you sign a 5 year operating lease for $10,000 and get the first 6 months free. The calculation to figure out your monthly payments is:

$60,000

-$6,000 (first 6 months free)

---

$54,000

÷60

---

$900 per month

The journal entries for the first 6 months would be:

Rent expense_______$900

______Rent payable_________$900

The entry for the subsequent months would be:

Rent expense_______$900

Rent payable________100

______Cash/rent payable____$1,000

Tim Gearty says its a reversing entry but I don’t understand why the journal entries are different. What’s the purpose of crediting rent payable in the first 6 months but debiting it the next 54? I have a feeling the matching principle has something to do with it but I can’t figure it out.

Thanks in advance.

[runnerup]

Assuming the lease is $12,000 a year, your monthly expense would be $1,000. Since you are getting 6 months free, your new monthly EXPENSE amount is $900 (even though you will be paying $1,000 after the first 6 months).

For the first 6 months, your JE is a credit to payable since you're not actually disbursing any cash. You are building up the credit you have on account with the lessor due to the 6 months free bit.

For the remainder, you debit $100 each month in order to reduce the balance to 0 at the end of the 5 years. Your expense is still the $900, but you are disbursing $1,000 to the lessor. In order for this to balance, you debit rent payable the $100.

ETA: The point is to take the expense evenly over the life of the lease.

REG 10/12/13 - 94
FAR 10/17/13 - 93
AUD 11/11/13 - 92
BEC 11/20/13 - 87
ethics 11/27/13 - 92%

[runnerup]

Assuming the lease is $12,000 a year, your monthly expense would be $1,000. Since you are getting 6 months free, your new monthly EXPENSE amount is $900 (even though you will be paying $1,000 after the first 6 months).

For the first 6 months, your JE is a credit to payable since you're not actually disbursing any cash. You are building up the credit you have on account with the lessor due to the 6 months free bit.

For the remainder, you debit $100 each month in order to reduce the balance to 0 at the end of the 5 years. Your expense is still the $900, but you are disbursing $1,000 to the lessor. In order for this to balance, you debit rent payable the $100.

ETA: The point is to take the expense evenly over the life of the lease.

REG 10/12/13 - 94
FAR 10/17/13 - 93
AUD 11/11/13 - 92
BEC 11/20/13 - 87
ethics 11/27/13 - 92%

[Study Monk]

Wow runnerup 4 tests in a little over a month with over a 90 average. I want to borrow your brain 😛

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

Wow runnerup 4 tests in a little over a month with over a 90 average. I want to borrow your brain 😛

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Author]

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