FAR Module 6 Part 1

Question 1

When should the lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?

At the inception of the lease.
Over the life of the lease.
At the expiration of the lease.
When received.

Answer 1

Since the lease bonus is nonrefundable, it represents income attributable to the lease term. Therefore, recognition is deferred and recognized equally over the life of the lease.

Question 2

As an inducement to enter a lease, Graf Co. a lessor, granted Zep Inc., a lessee, twelve months of free rent under a five-year operating lease. The lease was effective on January 1, Year 1, and provides for monthly rental payments to begin January 1, Year 2. Zep made the first rental payment on December 30, Year 1. In its Year 1 income statement, Graf should report rental revenue in an amount equal to:

1/5 of the total cash to be received over the life of the lease.
Cash received during Year 1.
1/4 of the total cash to be received over the life of the lease.
Zero.

Answer 2

Annual rental revenue equals the total rental revenue from the lease allocated over the full life of the lease. In this case, revenue equals total cash divided by five years.

Question 3

On June 1, of the current year, Oren Co. entered into a five-year nonrenewable lease, commencing on that date, for office space and made the following payments to Cant Properties:

Bonus to obtain lease $30,000
First month’s rent $10,000
Last month’s rent $10,000

In its income statement for the current year ended June 30, what amount should Oren report as rent expense?

$50,000
$10,000
$40,000
$10,500

Answer 3

Rent expense should include the first month’s rent and an allocated portion of the bonus. The last month’s rent should be shown as a prepaid expense:

1st month rent
+ Amortization of bonus (bonus *months past in term)

Question 4

Star Co. leases a building for its product showroom. The ten-year renewable lease will expire on December 31, Year 10. In January Year 5, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, Year 5, balance sheet?

$44,000
$45,600
$45,000
$43,200

Answer 4

Leasehold improvements should be amortized over the lesser of the remaining life of the lease (6 years), the life of the improvement (8 years). $48,000 / 6 = $8,000 amortization for a year or $4,000 for January Year 5 through June 30, Year 5.

Improvements
- Amortization