- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 8. Accounting and Reporting by the Lessee
CFA Practice Question
On October 1, 2015, Little Company signed an operating lease for a building with Big Company for 6 years, at $10,000 per year. At the inception of the lease, Little paid $20,000, covering rent for the first two years. Little closed its books on December 31 and correctly reported $20,000 as rent expense on its 2015 income tax return. How much should Little report in the 2015 income statement as rent expense?
A. $0
B. $2,500
C. $1,667
Explanation: Rent expense for the first three months (October 1 to December 31, 2015)
= $10,000 x 3/12
= $2,500
= $10,000 x 3/12
= $2,500
User Contributed Comments 5
| User | Comment |
|---|---|
| dini85 | unable to understand the explanation..can someone help? |
| sep10 | October --> December = 3 months in total. In P&L we should recognize only 3/12 of 10 000$ |
| jpducros | Confusing question since we hardly pay 2 years of lease in advance. |
| SMcalister | It's not confusing, its accrual accounting. You should have learned this in Level 1. Bring in a 'prepaid rent expense' on the balance sheet along with this. The income statement is not a cash flow statement. |
| kamal316 | Repeated soo many times .. going through this long q will not add any value anymore ... |