C is corrent. Rental revenue on operating leases should be recognized on a straight-line basis unless another method more reasonably reflects the pattern of use given by the lessor. When the pattern of cash flows under the lease agreement is other than straight-line, this will result in the recording of rent receivable or unearned rent. Norris’ total rent revenue [(1/2 * $8,000) + (4 * $13,000) = $56,000] should be recognized on a straight-line basis over the five-year lease term ($56,000 * 1/5 = $11,200). Since cash collected in year 1 is only $4,000 (one-half of $8,000, since the first six months are rent-free), Norris would accrue rent receivable and rental revenue of $7,200 ($11,200 - $4,000) at year-end to bring the rental revenue up to $11,200.
A is incorrect. Rental revenue on operating leases should be recognized on a straight-line basis unless another method more reasonably reflects the pattern of use given by the lessor. When the pattern of cash flows under the lease agreement is other than straight-line, this will result in the recording of rent receivable or unearned rent. Norris’ total rent revenue [(1/2 * $8,000) + (4 * $13,000) = $56,000] should be recognized on a straight-line basis over the five-year lease term ($56,000 * 1/5 = $11,200). Since cash collected in year 1 is only $4,000 (one-half of $8,000, since the first six months are rent-free), Norris would accrue rent receivable and rental revenue of $7,200 ($11,200 - $4,000) at year-end to bring the rental revenue up to $11,200.
A is incorrect. Rental revenue on operating leases should be recognized on a straight-line basis unless another method more reasonably reflects the pattern of use given by the lessor. When the pattern of cash flows under the lease agreement is other than straight-line, this will result in the recording of rent receivable or unearned rent. Norris’ total rent revenue [(1/2 * $8,000) + (4 * $13,000) = $56,000] should be recognized on a straight-line basis over the five-year lease term ($56,000 * 1/5 = $11,200). Since cash collected in year 1 is only $4,000 (one-half of $8,000, since the first six months are rent-free), Norris would accrue rent receivable and rental revenue of $7,200 ($11,200 - $4,000) at year-end to bring the rental revenue up to $11,200.
D is incorrect. Rental revenue on operating leases should be recognized on a straight-line basis unless another method more reasonably reflects the pattern of use given by the lessor. When the pattern of cash flows under the lease agreement is other than straight-line, this will result in the recording of rent receivable or unearned rent. Norris’ total rent revenue [(1/2 * $8,000) + (4 * $13,000) = $56,000] should be recognized on a straight-line basis over the five-year lease term ($56,000 * 1/5 = $11,200). Since cash collected in year 1 is only $4,000 (one-half of $8,000, since the first six months are rent-free), Norris would accrue rent receivable and rental revenue of $7,200 ($11,200 - $4,000) at year-end to bring the rental revenue up to $11,200.
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