CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

On January 1, 2015, Mill Corporation leased a machine to Ott Corporation for a 5-year term at an annual rental of $50,000. The lease is an operating lease. At the inception of the lease, Mill received $100,000, covering the first year's rent of $50,000 and a security deposit of $50,000. This deposit will not be returned to Ott upon expiration of the lease but will instead be applied to payment of rent for the last year of the lease. Mill properly reported rental revenue of $100,000 in its 2015 income tax return. Mill's tax rate was 30%. In Mill's December 31, 2015 balance sheet, what portion of the $100,000 should be reported as a liability?
A. $50,000
B. $40,000
C. $35,000
Explanation: Deposits and prepayments received for services to be provided in the future are unearned revenues that should be recorded as a liability until earned. The first year's rent is recorded as rent revenue, but the $50,000 deposit is recorded as rent collected in advance (unearned rent) because Mill is required to render future services (use of the machine) to the lessee. The rate (30%) does not affect the amount of the liability to the lessee, although a separate future income tax asset may be recorded in certain circumstances.

User Contributed Comments 5

User Comment
shasha deposit for last lease payment = unearned revenue
twintigers to offset the tax effect, a seperate income tax asset is recorded.
jpducros Shouldn't there be a Deferred tax asset accounted for 15 K then to reduce the 50 liability to 35 ?
poomie83 it may have something to with the fact that this is an OL.
And deferred taxes would indicate that the current revenue/expenses will cause a future tax liability/benefit. As this is unearned income, taxes don't come into play
GBolt93 Even if you had a deferred tax asset of 15k, you'd still report 50k as unearned revenue.
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