As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a
ID: 2585153 • Letter: A
Question
As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, 9 months of free rent under a 5-year operating lease. The lease is effective on July 1, Year 3, and provides for monthly rent payments of $1,000 to begin on April 1, Year 4. In Hompson’s income statement for the year ended June 30, Year 4, rent expense should be reported as A. $10,200 B. $9,000 C. $3,000 D. $2,550 As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, 9 months of free rent under a 5-year operating lease. The lease is effective on July 1, Year 3, and provides for monthly rent payments of $1,000 to begin on April 1, Year 4. In Hompson’s income statement for the year ended June 30, Year 4, rent expense should be reported as A. $10,200 B. $9,000 C. $3,000 D. $2,550Explanation / Answer
Correct Answer: A) $10,200
Notes
Rent on operating leases should be expensed on a straight-line basis unless another method is better suited to the particular benefits and costs associated with the lease. In this lease, the lessee must pay rent of $1,000 monthly for five years excluding the first nine months, or fifty-one months (60 - 9). Therefore, total rent expense for the five years is $51,000 (51 × $1,000). Recognizing rent expense on a straight-line basis, rent expense for the year 4 is $10,200 ($51,000 ÷ 5 years).
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