Deferred Rent – Debits and Credits

Deferred Rent

What is it?

The most straightforward way to recognize deferred lease is to imagine of an illustration. Let us say you began a business and the to start with factor you did was sign a five-12 months lease for business office space. In an effort to sign you as a tenant, the landlord (aka “lessor”) presents you decrease lease payments in the to start with 12 months that “escalate” (i.e. go up) as the several years progress. To continue to keep it very simple, let us say the lease program is this:

Calendar year one: $one,000 / thirty day period = $twelve,000 / 12 months
Calendar year two: $one,250 / thirty day period = $fifteen,000 / 12 months
Calendar year 3: $one,500 / thirty day period = $18,000 / 12 months
Calendar year four: $one,750 / thirty day period = $21,000 / 12 months
Calendar year 5: $two,000 / thirty day period = $24,000 / 12 months

These amounts characterize the actual cash that you will be paying out every thirty day period. When reserving the journal entries for this, this will be the credit rating (both to cash or a payable). The concern is what is the debit?

ASC segment 840-20-twenty five-one states the next:

Rent shall be billed to expenditure by lessees (noted as cash flow by lessors) above the lease phrase as it gets to be payable (receivable). If rental payments are not produced on a straight-line foundation, rental expenditure nevertheless shall be acknowledged on a straight-line foundation until another systematic and rational foundation is additional agent of the time pattern in which use advantage is derived from the leased home, in which situation that foundation shall be made use of.

You see, the FASB involves that rental expenditure be “acknowledged on a straight-line foundation.” This suggests that the identical volume of expenditure must be acknowledged every thirty day period, regardless of the actual lease payment for the duration of the thirty day period. Let us estimate our regular lease expenditure.

From the table earlier mentioned, we can simply compute that the overall lease compensated above the study course of the lease is $ninety,000. ($12k +$15k + $18k + $21k + $24k). This figure, divided by the overall months in the lease (60), provides us out straight-line lease expenditure:

Full Rent / Full Periods = Straight-Line Rent Expense for every interval

$ninety,000 / 60 months = $one,500 / thirty day period = $18,000 for every 12 months.

We now have the debit in our journal entry.

With a debit to expenditure for one volume and a credit rating to cash for another volume, the plug goes to deferred lease. Depending on the payment program, deferred lease can both be an asset or a liability.

In the situation of a lease with raising payments every 12 months, as in our illustration, deferred lease is a liability. The liability balance builds via the to start with two several years when the expenditure exceeds the cash payments, degrees off for the duration of 12 months 3 when these amounts are equivalent, and then drops down to zero above the study course of the ultimate two several years when lease expenditure is considerably less than the lease payments. The journal entries for every 12 months are as follows:

Journal Entries – Calendar year one

Dr. Rent expenditure one,500
Cr. Deferred lease 500
Cr. Income one,000

Journal Entries – Calendar year two

Dr. Rent expenditure one,500
Cr. Deferred lease 250
Cr. Income one,250

Journal Entries – Calendar year 3

Dr. Rent expenditure one,500
Cr. Income one,500

Journal Entries – Calendar year four

Dr. Rent expenditure one,500
Dr. Deferred lease 250
Cr. Income one,750

Journal Entries – Calendar year 5

Dr. Rent expenditure one,500
Dr. Deferred lease 500
Cr. Income one,750

In this article is the regular deferred lease liability balance above the study course of the lease:

http://big4guru.com/defrent.jpg

Source by Massive four Guru

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