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May I ask how to duel with the rent free period prior the commencement of lease term? for example, rental for 3 years starting from 1.1.2020, and there is 1 month rent free provided from 1.12.2019 to 31.12.2019
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I believe the rent free period should be treated as incentive. The lease rentals would have included the cost of providing this service as well. The fair value of this incentive should be deduced from the ‘Right to use” asset as it a separate item provided by lessor.
in case of lessee with exception rule
you have to divide total rent due with total period
eg 5 year lease 1000 per year and first year is free.
from lessee point of viewso total is 4*1000=4000/5= 800
first year entry
Dr profit and loss 800
Cr accrued income 800Year 2
Dr p n L 800
Dr accrued income 200
Cr cash 1000so at the end of year 5 accrued income balance will be nil.
in case of non exception
you treat it as an incentive and calculate present value of minimum lease payment by considering discount rate from AF0-4
lets suppose Implicit rate of interest is 5 percent then
n=4
r= .051-(1+r)^-n/r=3.546*1000
3546 PV of min lease payments
Dr right of use 3546
Cr Lease liability 3546subsequently at amortized cost
I hope that will help .
@f6ali said:
If you want to ask directly from the tutor, kindly start a thread in Ask the tutor Forum. This forum is for students to help each other.I believe the rent free period should be treated as incentive. The lease rentals would have included the cost of providing this service as well. The fair value of this incentive should be deduced from the ‘Right to use” asset as it a separate item provided by lessor.
this is not reimbursement so we cannot deduct from right of assets. it reduces our liability towards payment.
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