Straight-Line Rent Quiz

QUESTIONS

1. The goal of "straight-lining" a rental contract is to...

        A) Allocate the expense evenly over the life of the lease

        B) Recognize more expense at the beginning of the lease

 

2. The first step in straight-lining a rental contract is to...

        A) Calculate the total amount of cash payments over the life of the lease

        B) Calculate the total number of cash payments over the life of the lease

 

3. The second step in straight-lining a rental contract is to...

        A) Calculate the number of months included in the life of the lease

        B) Calculate the total number of cash payments over the life of the lease

 

4. The third step in straight-lining a rental contract is to...

        A) Divide the total amount of cash payments by the number of months in the lease

        B) Divide the total number of cash payments by the number of months in the lease

 

5. The straight-line method pays close attention to the timing of cash payments...

        A) True

        B) False

 

6. The entity using the rental space, or equipment, is known as the...

        A) Lessee

        B) Lessor

 

7. Deferred rent can either be an asset or a liability...

        A) True

        B) False

 

8. Lessors can offer a few months free of rent as...

        A) An incentive for the lessee to sign the lease

        B) A way of making the accounting less complicated

 

9. An entity using the cash basis would use the straight-line method...

        A) True

        B) False

 

10. Under an entity using the straight-line method, the difference between the rental expense and the cash payment is booked to...

        A) Deferred Rent

        B) Unearned Revenue

 

ANSWER KEY:

1A, 2A, 3A, 4A, 5B, 6A, 7B, 8A, 9B, 10A

 

PRACTICE PROBLEMS

 A lease has the following key points:

The lease is for a 36 month period, requiring $10,000 a month in rent. However, the lessee will receive free rent for months 2, 18, and 36.

1. What is the total amount of cash payments required by the lease?

2. How many months exist during the life of the lease?

3. What is the straight-rental expense per month of the lease?

4. What will be the journal entry for month 1?

5. What will be the journal entry for month 2?

6. What will be the balance in the deferred rent account at the end of month 1? At the end of month 2?

7. What will be the balance in the deferred rent account at the end of month 36? 

 

  

ANSWER KEY:

1: (36 - 3) x $10,000 = $330,000

 

2. 36

 

3. $330,000 ÷ 36 = $9,166.67

 

4. Rent Expense $9,166.67

Deferred Rent $833.33

        Cash ($10,000)

 

5. Rent Expense $9,166.67

        Deferred Rent ($9,166.67)

 

6. At the end of month 1, Deferred Rent will have a positive (asset) balance of $833.33 from the first journal entry.

At the end of month 2, Deferred Rent will have a negative (liability) balance of ($8,333.34).

 

7. At the end of month 36, the Deferred Rent balance is guaranteed to be zero. The account is used as a sort of holding account that balances the variance between the rental expense recognized and the cash payments being made. At the end of the lease, it will always be zero.