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Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20X2. Under the terms of the operating lease, rent for the first year is $8,000 and rent for years 2 through 5 is $12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free. In its December 31, 20X2, income statement, what amount should Wall report as rental income

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Answer:

Since the lease amount varies, we must calculate the annual rental income using the following formula:

annual rental income = {lease year 1 - (lease year 1 x 6/12) + [lease year 2(and beyond) x number of remaining contract years] / total number of contract years}

annual rental income = [$8,000 - ($8,000 x 6/12) + ($12,500 x 4)] / 5 years = {$8,000 - $4,000 + $50,000} / 5 years = $54,000 / 5 = $10,800

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