On September 1,2016,Custom Shirts Inc.entered into a lease agreement appropriately classified as an operating lease.The lease term is three years.The annual payments are (a)$20,000 for year 1, (b)$24,000 for year 2,and (c)$28,000 for year 3.How much rent expense will Custom Shirts recognize for 2016?
A)$ 6,667.
B)$24,000.
C)$20,000.
D)$ 8,000.

Question

Quizplus · Accepted Answer

The total lease payments over the three years are $72,000 ($20,000 + $24,000 + $28,000). The annual rent expense is the total lease payments divided by the lease term: $72,000 / 3 = $24,000 per year. For 2016, only four months of rent expense is recognized (September to December), which is $24,000 / 12 * 4 = $8,000.