Your Ask Joey ™ Answer

What is a lease inducement or lease incentive?

A lease incentive, which is also commonly referred to as a lease inducement, is when the landlord (lessor) offers a deal to the lessee to sign the lease. Common examples include free rent for 3, 6, or 12 months, or you could see reduced rent for the first year if the lease term is multiple years. The key thing to understand is that this results in a difference between cash rent and rent expense in the financial statements.

To calculate monthly rent expense, you must calculate the total cash paid for rent over the entire lease life and then divide by the number of months (i.e. 4 years = 48 months). For example, if you are charged $3,000 per month in Year 1, $4,500 in year 2, and then $6,000 in years 3 and 4, your monthly rent expense under U.S. GAAP would end up being $4,875.

Back To All Questions

You might also be interested in...

  • CECL Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)

  • Journal Entry for Direct Materials Variance

    Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...

  • Understanding Variance Analysis

    Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...