Posted by Anoymous on .
On January 1, 2009, Sweetwater Furniture Company leased office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year. The payments are $11,000 the first year and increase by $600 per year. Benefits expected from using the office space are expected to remain constant over the lease term.
Record Sweetwater's rent payment at December 31, 2013 (the fifth rent payment) and December 31, 2023 (the 15th rent payment).
I figured out for the 5th and 15th rental payment you would:
dr. Rent Expense
cr. Deferred Rent Expense Payable
But I cannot figure out what amount the rent expense and cash would be on each of these payments. Can someone help me?
I know this is late, but its mostly to those that will get this problem at some point. You are right about the journals. To find the Rent expense, you need to add ALL payments (11,000+11,600+12,200+12,800+...+23,000) then divide by 21 (the term of the lease)
To find Cash, multiply 600*4=2,400 then add the 10,000 of the first year. With this you should be able to find Deferred Rent Expense Payable. Hope you understand, sorry if I don't write all details, but I'm working on my hw
Thank you for the answer!
Cash should be (600*4)+11000 not "10,000"
I got rent expense without dividing by the term, so that's the total off all payments considering the annual increase.
Defferred Rent Expense = Rent expense - Cash
Sorry, for the mistake I made in the above post, here is the solution. Hope my calculation is correct but this is the right formula that needs to be used. The JE for 2013 mentioned above is correct; however for 2023 the JE should be:
Dr. Rent Expense
Dr. Defferred Rent Expense Payable
December 31, 2013:
Rent expense ($11,000 + [$600 × 20 ÷ 2])* = $17,000
Cash ($11,000 + [$600 × 4]) = $13,400
December 31, 2023:
Rent expense ($11,000 + [$600 × 20 ÷ 2]) * = $17000
Cash ($11,000 + [$600 × 14]) = $19,400
* This is the average rent over the 20-year period. Also: (Beg. Rent $8,500 + Ending Rent $20,500) ÷ 2