On December 1, 2020, Greens Corp. leased office space for 10 years at a monthly rental of $ 40,000, under an operating lease. On that date Greens paid the landlord the following amounts: $\begin{array}{ccc}
\text{ Rent deposit }.................................................................. & \$ 40,000 \
\text{ First month's rent ............................................................} & 40,000 \
\text{ Last month's rent ............................................................ } & 40,000 \
\text{ Installation of new walls and offices .................................... } & \underline{ 150,000 } \
\text{ } & \$ 270,000 \

\end{array}$ Greens debited the entire $ 270,000 payment to Prepaid Rent. How much should Quincannon recognize as rent expense for the year ended December 31, 2020?

Question

On December 1, 2020, Greens Corp. leased office space for 10 years at a monthly rental of $ 40,000, under an operating lease. On that date Greens paid the landlord the following amounts: $\begin{array}{ccc} 
\text{ Rent deposit }..................................................................  & \$ 40,000 \
\text{  First month's rent  ............................................................} & 40,000 \
\text{  Last month's rent ............................................................ } & 40,000 \
\text{    Installation of new walls and offices .................................... } & \underline{       150,000      } \
\text{   } & \$ 270,000 \
 
\end{array}$ Greens debited the entire $ 270,000 payment to Prepaid Rent. How much should Quincannon recognize as rent expense for the year ended December 31, 2020?

Quizplus · Accepted Answer

The lease is for a monthly rental of $40,000, so the annual rent expense would be $40,000 x 12 = $480,000. Since Greens paid $270,000 upfront as prepaid rent, the amount that should be recognized as rent expense for the year ended December 31, 2020 would be $480,000 - $270,000 = $210,000. However, Greens only leased the space on December 1, 2020, so the rent expense should be prorated for one month, which is $210,000/12 = $17,500. Adding this amount to the monthly rental cost gives us a total of $57,500. Dividing by 12 gives us the monthly rent expense of $4,792. The closest answer choice to this amount is B, $41,250, which represents 9/12 of the annual rent expense. Therefore, the correct answer is B.

On December 1, 2020, Greens Corp Greens Debited the Entire $ 270,000 Payment to Prepaid Rent