On January 1, 2015, Lessor Inc. acquired a building with a cost of P500,000 and residual value of P50,000. The estimated useful life of building is 10 years. On July 1, 2015, Lessor Inc. leased out the building to Lessee Inc. for 4 years with monthly rental of P10,000, P20,000, P30,000 and P40,000 from 1st year to 4th year. The parties agreed that the first 3 months of the initial year should be rent-free. The following related transactions and lease terms are also provided: a) On July 1, 2015 Lessor Inc. incurred an initial direct cost of P40,000 while Lessee Inc. incurred initial direct cost of P20,000. b) On July 1, 2015 Lessee Inc. constructed leasehold improvement to the building with a total cost of P60,000, residual value of P20,000 and useful life of 3 years. c) On July 1, 2015 Lessee Inc. paid rent bonus in the amount of P16,000 as an inducement for the lease and security deposit returnable at the end of the lease term in the amount of P25,000. d) Aside from the monthly rental, Lessee Inc. agreed to pay 10% contingent based on its gross revenue. During 2015, Lessee Inc. reported P150,000 gross revenue. e) During 2015, Lessor Inc. paid real property tax of P5,000, insurance of building for one year in the amount of P3,000 and repairs and maintenance expense in the amount of P2,000. Required: Based on the result of your audit, determine the following: __________1. Net rent income of Lessor Inc. for the year ended December 31, 2015 __________2. Total rent related expense to be reported by Lessee Inc. for the year ended December 31, 2015 __________3. Noncurrent receivable to be reported by Lessee Inc. as of December 31, 2015 __________4. Carrying value of building to be reported by Lessor Inc. as of December 31, 2016 __________5. Rent payable to be reported by Lessee Inc. as of December 31, 2016
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2015, Lessor Inc. acquired a building with a cost of P500,000 and residual value of P50,000. The estimated useful life of building is 10 years. On July 1, 2015, Lessor Inc. leased out the building to Lessee Inc. for 4 years with monthly rental of P10,000, P20,000, P30,000 and P40,000 from 1st year to 4th year. The parties agreed that the first 3 months of the initial year should be rent-free. The following related transactions and lease terms are also provided:
a) On July 1, 2015 Lessor Inc. incurred an initial direct cost of P40,000 while Lessee Inc. incurred initial direct cost of P20,000.
b) On July 1, 2015 Lessee Inc. constructed leasehold improvement to the building with a total cost of P60,000, residual value of P20,000 and useful life of 3 years.
c) On July 1, 2015 Lessee Inc. paid rent bonus in the amount of P16,000 as an inducement for the lease and security deposit returnable at the end of the lease term in the amount of P25,000.
d) Aside from the monthly rental, Lessee Inc. agreed to pay 10% contingent based on its gross revenue. During 2015, Lessee Inc. reported P150,000 gross revenue.
e) During 2015, Lessor Inc. paid real property tax of P5,000, insurance of building for one year in the amount of P3,000 and repairs and maintenance expense in the amount of P2,000.
Required: Based on the result of your audit, determine the following:
__________1. Net rent income of Lessor Inc. for the year ended December 31, 2015
__________2. Total rent related expense to be reported by Lessee Inc. for the year ended December 31, 2015
__________3. Noncurrent receivable to be reported by Lessee Inc. as of December 31, 2015
__________4. Carrying value of building to be reported by Lessor Inc. as of December 31, 2016
__________5. Rent payable to be reported by Lessee Inc. as of December 31, 2016
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