Leases Question – CPA-00567

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  • #185654
    Anonymous
    Inactive

    On January 1, Year 1, Glen Co. leased a building to Dix Corp. for a ten-year term at an annual rental of $50,000. At inception of the lease, Glen received $200,000 covering the first two years’ rent of $100,000 and a security deposit of $100,000. This deposit will not be returned to Dix upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $200,000 should be shown as a current and long-term liability, respectively, in Glen’s December 31, Year 1 balance sheet?

    Choice “c” is correct. $50,000 current; $100,000 long-term.

    Rule: Operating lease payments to a lessor that should be deferred include security deposits, prepaid rent, and the unamortized portion of non-refundable payments to the lessor for leasehold modifications.

    Does anyone know why the other $50,000 for year 2 is not recognized as either current or long term liability? Of the $200,000, only $150,000 is reflected on the Balance Sheet.

Viewing 3 replies - 1 through 3 (of 3 total)
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  • #1424228
    youngfaye
    Participant

    Same question.

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    #1424249
    Stilgoin
    Participant

    Would the 50,000 for year one be the rent payment, the 50,000 for year two the current liability, and the 100,000 the non-current liability?

    Dr Cash 200,000
    Cr Rent Income 50,000
    Cr Deferred Rent Liability current 50,000
    Cr Deferred Rent Liability non-current 100,000

    Stilgoin, CPA

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    #1424280

    Hello,

    Okay….so we have 200,000 that was given as a prepayment. We need to break this down. 50,000 will be recognized this year (year 1). This eliminates 50,000 of the 200,000, leaving 150,000 to account for. 50,000 will be earned next year, therefore we will classify it as a current liability on our Balance Sheet for 12/31/Year 1. That leaves us with 100,000 we need to account for. The security deposit of 100,000 has not been earned yet, and seeing that it will be applied to the last two years of rent, many years in the future, this will be classified as a long term liability.

    Breakdown…

    Rent Revenue: 50,000

    Current Liability: 50,000

    Long Term Liability (Security Deposit): 100,000

    Let me know if this helps.

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