Scenario 1: Tenant has access to the entire warehouse, even though it is only utilizing 50,000SF as stated in the lease agreement.
Subsequent to that you would debit your expense, credit cash and the difference would be your deferred rent. Typically if your lease is terminated as opposed to being amended to include the new landlord, then you would need to remove the deferred rent account from the balance sheet. In order to do so you would need to debit the deferred rent account (in your case for $200,000) to eliminate the entire amount. The offsetting credit could be either to reduce the rent expense account or to an “other income” account. In either case, it would be useful to disclose the transaction in the notes of the financial statement in order assist the user of the statements in understanding the effects of the transaction.
Typically, if your lease is terminated as opposed to being amended to include the new landlord, then you would need to remove the deferred rent account from the balance sheet. In order to do so, you would need to debit the deferred rent account to eliminate the entire amount. You can refer to FASB ASC for more information on how to book the termination penalty. Another common source of deferred tax liability is an installment sale, which is the revenue recognized when a company sells its products on credit to be paid off in equal amounts in the future. Under accounting rules, the company is allowed to recognize full income from the installment sale of general merchandise, while tax laws require companies to recognize the income when installment payments are made.
For instance, if May is the first month, and starts the first period for rent abatement for the 18 months, you would begin amortizing rent effective May 1st. If the 180 month period began April 15 the recognition of rent expense should start in April with ½ month of calculated straight line rent. One common example is escalating lease payments where the amounts charged over the life of the lease increases, usually on an annual basis.
In addition, initial direct costs (IDC) are capitalized for tax purposes unless they are de minimus (meaning that they do not exceed $5,000 in the aggregate for US Federal purposes). The same approach to deferred rent accounting applies when the rent amount changes over time. For example, if the lease rate increases after a number of months, the average rent expense is still charged in all months, with a portion of this charge being included in the deferred rent liability. Later, when payments match the higher rate but the average rent expense is still being charged, the deferred rent liability will gradually decline. In all successive months of the lease, continue to charge the same average amount to expense.
This creates a temporary positive difference between the company’s accounting earnings and taxable income, as well as a deferred tax liability. From the perspective of the renter, a rent payment for the next month may sometimes be made at the end of the immediately preceding month. In this case, the renter records a debit to the prepaid expenses (asset) account and a credit to the cash account. A landlord’s experience with these late payments may be so bad that it makes more sense to not accrue them at all, and instead only record revenue upon the receipt of cash (which is inclined more toward the cash basis of accounting).
The installments for the accumulated charges of several months for the deferred charges are then posted as debit entries in the cash account and as credit entries in the specific supplier account. A corporate bookkeeper follows rules to record unearned income and straight-line depreciation entries.
How do you calculate straight line rent in Excel?
The straight-line concept is based on the idea that the usage of the rental arrangement is on a consistent basis over time; that is, the rented asset is used at about the same rate from month to month. To calculate straight-line rent, aggregate the total cost of all rent payments, and divide by the total contract term.
If an offsetting rent payment is made (a credit to reduce cash) and the payment does not match the expense, the difference is charged to the deferred rent liability account. To continue with the example, the monthly payment in all other months is $1,000, which is $83 higher than the amount charged to rent expense. This difference is used to reduce the amount of the deferred rent liability over the remaining months of the lease, until it is reduced to zero. Accountants like the straight line method because it is easy to use, renders fewer errors over the life of the asset, and expenses the same amount everyaccounting period.
The excess of expense over payments ($560 -$500) during the first two years would be credited to an accrued liability account (deferred rent) each month. In subsequent months, the accrued liability would be reduced by the excess of the monthly payments over the monthly expense ($600 − $560).
To post deferred revenue, the bookkeeper debits the cash account and credits the deferred income account, which is a liability account. To record asset depreciation, the junior accountant debits the depreciation expense account and credits the accumulated depreciation account. In accounting terminology, debiting the cash account means increasing company money. Cash, deferred revenue and accumulated depreciation are balance sheet items, leaving depreciation expense alone in a corporate income statement. Differences between monthly rent expenses and rent payments are known as deferred rents.
- The depreciation expense for long-lived assets for financial statements purposes is typically calculated using a straight-line method, while tax regulations allow companies to use an accelerated depreciation method.
- A common source of deferred tax liability is the difference in depreciation expense treatment by tax laws and accounting rules.
Your situation is a unique situation that I am not aware is specifically covered by any guidance. The guidance that is out there is for your traditional lease arrangements that have escalating lease payments. In your situation, since you have percentage rent that is applicable in the first three years, it would make sense to recognize the actual rent incurred for that year since it is variable to your percentage rent base. Usually, I see percentage rate based off of net sales/revenues, however your base may be different.
Straight-Line Rent Calculation for Leases where Tenant is Required to Expand in Future (Must-Takes)
Accordingly, this rent expense will vary in direct relation to the base that is being used to calculate the base rent. Starting in year four, when base rent commences, you would want to calculate the straight -line lease expense over the remainder of the period. Any further percentage rent above and beyond the base rent starting in year four, would be recognized in the year it occurs. Since it is difficult to determine what the percentage rent is going to be since the base that will be used is undeterminable up front, I believe there is good support to approach it this way. Then in year four, you can start recognizing the expense monthly on the straight-line basis.
Audit + Accounting: Summing It All Up
A common source of deferred tax liability is the difference in depreciation expense treatment by tax laws and accounting rules. The depreciation expense for long-lived assets for financial statements purposes is typically calculated using a straight-line method, while tax regulations allow companies to use an accelerated depreciation method. Since the straight-line method produces lower depreciation when compared to that of the under accelerated method, a company’s accounting income is temporarily higher than its taxable income. In accounting, the costs of deferred charges are not posted every month, but rather, are posted as accumulated figures for a given period after the costs have been incurred.
To determine your lease expense you would need to take the minimum payments over the life of your lease, in your case for 7 years. Beginning in the first month, you would record the excess over the expense as deferred rent payments. Your debit would be to rent expense and your credit would be to your accrued liability in the first six months.
Unlike prepaid expenses that are posted and charged to accounts on a monthly basis, deferred charges are paid in lump sum figures. As for the posting, a deferred charge amount is posted as a credit entry in the deferred charges account and classified as a current asset. The credit entry for the transaction is posted to the accounts payable account.
This latter situation tends not to last long, since the renter will have violated the terms of the rental agreement, and can then be evicted. Deferred rent occurs in lease accounting when the cash rent payments are different than its recognized financial statements and often occurs when a lessee is given free rent in one or more periods. The vast majority of the time, the deferred rent recorded is the difference between the straight-line rent recognized for book purposes and the rent deductible for tax purposes (which is usually the cash paid). Under current GAAP for lease accounting, a lessee would generally record a deferred tax asset for the deferred rent liability recorded on the books.
Unlike more complex methodologies, such asdouble declining balance, straight line is simple and only uses three different variables to calculate the amount of depreciation each accounting period. That should be the point as to when the expense would need to start being recognized. Rent would be recognized over the duration of the lease period from the commencement date.
The balance in a deferred rent account normally increases, reaches its highest point and then gradually decreases as the lease term approaches its end. Total rent expense (payments) under the lease would be $33,600 and the amount charged to expense each month during the lease term would be $560 (33,600 ÷ 60 months).