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Period-End Close SeriesDeferred Rent Asset/Liability
Bill Hanna, CPADate prepared: September 22, 2015
Why it occurs
The cost of rent has been incurred, but not yet paid or
vice-versa.
Most frequent example
Rent holidays: Landlord gives a rent-free initial period typically between 1-
6 months.
Step 1
Determine Monthly Rent Expense
Monthly Rent Expense =
Total Rent Payments Over Lease Term
Number of Month
Step 2
Determine whether an Asset or Liability
Deferred Rent AssetRent Expense – Rent Payment = Negative
Deferred Rent LiabilityRent Expense – Rent Payment = Positive
ExampleEinstein LLC enters a lease agreement for an office space
The TermsLease term 2 yearsLease payments Year 1 = $10,000/month
Year 2 = $11,000/month
Total Rent Payments = $10,000 x 12 + $11,000 x 12 = $252,000
Monthly Rent Expense = 252,000/24 months or $10,500 per month
So as you see….
During Year One: We pay 10K, while the actual expense is 10.5K(Creating Def. Rent Liability)
During Year Two: We pay 11K, while the actual expense is 10.5K(Creating a reduction to the Def. Rent Liability)
Here is the table to break it downYear Month Rent Rent Monthly Cumulative
Expense Payment Deferred Rent Deferred Rent1 1 10,500 10,000 500 5001 2 10,500 10,000 500 1,0001 3 10,500 10,000 500 1,5001 4 10,500 10,000 500 2,0001 5 10,500 10,000 500 2,5001 6 10,500 10,000 500 3,0001 7 10,500 10,000 500 3,5001 8 10,500 10,000 500 4,0001 9 10,500 10,000 500 4,5001 10 10,500 10,000 500 5,0001 11 10,500 10,000 500 5,5001 12 10,500 10,000 500 6,0002 13 10,500 11,000 -500 5,5002 14 10,500 11,000 -500 5,0002 15 10,500 11,000 -500 4,5002 16 10,500 11,000 -500 4,0002 17 10,500 11,000 -500 3,5002 18 10,500 11,000 -500 3,0002 19 10,500 11,000 -500 2,5002 20 10,500 11,000 -500 2,0002 21 10,500 11,000 -500 1,5002 22 10,500 11,000 -500 1,0002 23 10,500 11,000 -500 5002 24 10,500 11,000 -500-
252,000 252,000-
The Monthly Journal Entries
During Year One:
Accounts Payable enters this:Dr. Rent Expense $10,000
CR. A/P $10,000Month-end adjusting entry (to increase expense and liability):Dr. Rent Expense $500
CR. Def. Rent Liab. $500
During Year Two:
Accounts Payable enters this:Dr. Rent Expense $11,000
CR. A/P $11,000Month-end adjusting entry (to decrease expense and liability):Dr. Def. Rent Liab. $500
CR. Rent Expense $500
Thank You!