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(all figures in $)
In operating lease, lets say the lessee pays a deposit of 4000. And has to pay an annual rent of 5000 annually for the next 4 year for an asset.
So the total charge for the I/S at the end of first year is (4000+(5000*4))/4 = 6000. But since we paid 4000+5000 (i.e 9000) in the first year there is a current asset (prepaid expenses) of 3000 i.e. 9000-6000= 3000. But what happens to this 3000 at second year end? Does the prepaid expenses get written off 1000 each year and shown as 2000? or is it written off completed after first year?
First of all, the first year is calculated as …
(4,000 / 4) + 5,000 = 6,000
I can’t understand why you feel it would be easier to multiply the annual payment by 4 and then divide it by 4!
At the end of the first year there is a prepayment of $3,000 but only $1,000 is current.
The remaining $2,000 is a deferred asset
It is most improbable that you will be faced with this situation in an accounts preparation question