On January 1, Year 1, Lessee signs a 3-year operating lease. Payments are: Year 1: $0 (Free rent); Year 2: $15,000; Year 3: $21,000. What is the Lease Expense for Year 1?

Answer options:

$12,000

$15,000

$36,000

How to approach this question

Operating Lease Expense is recognized on a Straight-Line basis. Sum total payments / Lease Term.

Full Answer

B.$12,000✓ Correct

Total Payments = $0 + $15,000 + $21,000 = $36,000. Lease Term = 3 Years. Annual Expense = $36,000 / 3 = $12,000. (Entry Year 1: Dr Lease Expense 12k; Cr ROU Asset/Liab net impact/Cash... actually Cr Lease Liability/Cash. Since cash is 0, Dr Expense 12k, Cr Liability/ROU adjustment 12k).

Common mistakes

Expensing cash paid ($0).

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On January 1, Year 1, Lessee signs a 3-year operating lease. Payments are: Year 1: $0 (Free rent); Year 2: $15,000; Year 3: $21,000. <br/><br/>What is the Lease Expense for Year 1?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 5

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