ExpertMedium1 markMultiple Choice
CPA · Question 42 · Area III: Select Transactions
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?
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?
Answer options:
A.
$0
B.
$12,000
C.
$15,000
D.
$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
B
Total Payments = $0 + $15,000 + $21,000 = $36,000.<br/>Lease Term = 3 Years.<br/>Annual Expense = $36,000 / 3 = $12,000.<br/>(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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