CHAPTER 15 Leases 861 Journal entries for Illustration 15–5 are shown in Illustration 15–5A . In an operating lease, rent is recognized on a straight-line basis unless another systematic method more clearly reflects the benefits of the asset’s use. So, if rental payments are uneven—for instance, if rent increases are scheduled—the total scheduled payments ordinarily would be expensed equally (straight-line basis) over the lease term. 12 Advance Payments Often lease agreements call for advance payments to be made at the inception of the lease that represent prepaid rent. For instance, it is common for a lessee to pay a bonus in return for negotiating more favorable lease terms. Such payments are recorded as prepaid rent and allocated (normally on a straight-line basis) to rent expense/rent revenue over the lease term. So the rent that is periodically reported in those cases consists of the periodic rent payments themselves plus an allocated portion of prepaid rent. In the journal entries above and throughout the chapter, we look at the entries of the lessee and the lessor together. This way, we can be reminded that the entries for the lessor usually are essentially the mirror image of those for the lessee, the other side of the same coin. 13 Sometimes advance payments include security deposits that are refundable at the expiration of the lease or prepayments of the last period’s rent. A refundable security deposit is recorded as a long-term receivable (by the lessee) and liability (by the lessor) unless it is not expected to be returned. A prepayment of the last period’s rent is recorded as prepaid rent and allocated to rent expense/rent revenue during the last period of the lease term. At times, lease agreements call for uneven rent payments during the term of the lease. One way this can occur is when the initial payment (or maybe several payments) is waived. This is called a rent abatement or rent holiday . Alternatively, rent payments may be scheduled to increase periodically over the lease term. But, there is no such thing as free rent. Instead, later rent payments are high enough to compensate the lessor for receiving no payments or low payments early in the life of the lease. In response, we account for these arrangements by summing the total payments over the life of the lease and then expensing them in each period of the lease on a straight-line basis. This means the rent expense will be 12 FASB ASC 840–20–25: Leases–Operating Leases–Recognition (previously “Accounting for Operating Leases with Scheduled Rent Increases,” FASB Technical Bulletin 85-3 (Stamford, Conn.: FASB, 1985), par. 1). 13 We see later in the chapter that sometimes this is not the case, particularly when the lease is a “sales-type” lease. Even when the two sides are not mirror images there are many similarities, so the comparison still is helpful. Illustration 15–5A Journal Entries for an Operating Lease A rent abatement occurs when the initial payment (or maybe several payments) is waived. The operating lease described in Illustration 15–5 is recorded as follows: At Each of the Four Payment Dates Sans Serif Publishers, Inc. (Lessee) Prepaid rent ............................................................................. 100,000 Cash .................................................................................... 100,000 CompuDec Corporation (Lessor) Cash ......................................................................................... 100,000 Deferred rent revenue ........................................................ 100,000 At the End of Each Year Sans Serif Publishers, Inc. (Lessee) Rent expense ........................................................................... 100,000 Prepaid rent ........................................................................ 100,000 CompuDec Corporation (Lessor) Deferred rent revenue ............................................................. 100,000 Rent revenue ...................................................................... 100,000 Depreciation expense ............................................................. x,xxx Accumulated depreciation ................................................. x,xxx At the beginning of the year, the rent payments are prepaid rent to the lessee and deferred rent to the lessor. The lessor retains the asset on its books, and accordingly records depreciation on the asset.
Spiceland_Inter_Accounting8e_Ch15
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