Rent free period prior the commencement of lease term

This topic has 3 replies, 3 voices, and was last updated 2 years ago by misbahkiran.

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March 25, 2020 at 5:00 am #565702
tinolo1988
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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
March 25, 2020 at 12:26 pm #565788
f6ali
Moderator
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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.
July 5, 2020 at 11:40 pm #576078
misbahkiran
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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 view

so total is 4*1000=4000/5= 800

first year entry

Dr profit and loss 800
Cr accrued income 800

Year 2

Dr p n L 800
Dr accrued income 200
Cr cash 1000

so 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= .05

1-(1+r)^-n/r=3.546*1000

3546 PV of min lease payments

Dr right of use 3546
Cr Lease liability 3546

subsequently at amortized cost

I hope that will help .
July 5, 2020 at 11:42 pm #576079
misbahkiran
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@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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