Question

(Accounting for an Operating Lease) On January 1, 2017, a machine was purchased for \(900,000 by Young Co. The machine is expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The machine was leased to St. Leger Inc. on January 1, 2017, at an annual rental of \)210,000. Other relevant information is as follows.

1. The lease term is for 3 years.
2. Young Co. incurred maintenance and other executory costs of \(25,000 in 2017 related to this lease.
3. The machine could have been sold by Young Co. for \)940,000 instead of leasing it.
4. St. Leger is required to pay a rent security deposit of \(35,000 and to prepay the last month’s rent of \)17,500.

Instructions

(b) What amount should St. Leger Inc. report for rent expenses for 2017 on this lease?

Short answer

Rent expense $210,000.

Step-by-step solution

Meaning of Rent expense

The term rent expense refers to thetotal cost paid for the rented property.It is one of the most important expensesrecorded by most firms after COGS and compensation expenses.

Explaining the amount of rent expense

St. Leger Inc.’s report for rent expense for 2017 on this lease is $210,000

The annual rental expense for the lease is $210,000

Note: Both the rent security deposit and the last month’s rent prepayment should be reported as noncurrent assets.