On September 1, 2009, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is 3 years. The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2009?
A)$ 6,667.
B)$24,000.
C)$20,000.
D)$ 8,000.

Question

Quizplus · Accepted Answer

Custom Shirts Inc. entered into the lease agreement on September 1, 2009, which means they only had 4 months left in the year. Therefore, the rent expense for 2009 will only be for 4 months or 1/3 of the annual payments for year 1. 
Rent expense for 2009 = 1/3 x $20,000 = $6,667. 
Option A is correct, which is $6,667.