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: 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?
A) $ 40,000
B) $ 41,250
C) $ 27,000
D) $ 154,000

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:  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?
A) $ 40,000 
B) $ 41,250 
C) $ 27,000 
D) $ 154,000

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.