Chapter 8 - Operating LeaseRent DepositFor Lessor = LiabilityFor Lessee = Rent Deposit

Lease BonusFor Lessor = Unearned Rent Income (amortized over lease term) (credit to Rent Income)For Lessee = Prepaid Rent (amortized over lease term) (debit to Rent Expense)

Leasehold ImprovementFor Lessee only = Depreciated over life of the improvement or lease term, whichever is shorter (residual value is ignored)

Leased PropertyFor Lessor only = depreciate normally

Initial Direct Costs (deferred)For Lessor = deferred amount is added to the CARRYING AMOUNT of the leased asset and EXPENSED over the lease term Recorded as:Deferred Initial Direct CostxxAmortized as:Amortization of initial Direct costxxCashxxDeferred Initial Direct Costxx

Executory Cost (Property Taxes, Insurance, Maintenance Cost) = to be Expensed outright by the party who paid it

Commission = expensed over the lease term

Problems with unequal Payments / Problems with Rent-freea. Problems with Rent-Free but EQUAL ANNUAL PAYMENTS1. Rental Fee x remaining years of lease (after rent-free period) = Total Rental Fee2. Total Rental Fee/total years of lease = Average Annual Rental Fee

b. Problems with Rent-free and UNEQUAL ANNUAL PAYMENTS1. Add all UNEQUAL RENTAL FEE to get the Total Rental Fee (watch out for the first rental fee as it may be applicable only for months and not the whole year)2. Total Rental Fee/total years of lease = Average Annual Rental Fee

Average Annual Rental Fee = recorded as Rent Income (Lessor) or Rent Expense (Lessee)Rent Receivable = difference between Average Annual Rental Fee and Cash Received (Lessor) or Cash Paid (Lessee)