USA How to account for giving a tenant free rent?

[10point]

My company entered into a new commercial lease with a new tenant. As part of the lease we are giving them the first 6 months rent free. As the lessor how do I account for that? As in what journal entries do I need to do?

 

[DrStrangeLove]

You could model it after trade discounts on retail: Book the full rent a Gross Rent Revenue revenue account, book the discount to a Rent Discount contra-revenue account, and the balance to a Rent Receivable asset account.

So, assume you charge $1,000/month for rent, and give them a 20% discount for the first six months. Each month they get the discount you'd book:

DR Rent Receivable $800
DR Rent Discount $200
CR Gross Rent Revenue $1000

If you give them "free rent", you'd book just DR Rent Discount/CR Gross Rent Revenue. Once the discount period is over, you'd just book DR Rent Receivable/CR Gross Rent Revenue.

Then in your income statement, you'd net the Rent Discounts account against the Gross Rent Revenue account to get a Net Rent Revenue line.

 

[kirby]

Hi 10point
This is actually the correct method:

Deferred rent accounting — AccountingTools

Deferred rent accounting occurs when a tenant is given free rent in one or more periods, usually at the beginning of a lease agreement.

www.accountingtools.com

and same method is shown here with a little more explanation

How to Account for Rent Free Periods: 10 Steps (with Pictures)

In order to attract tenants (lessees), landlords (lessors) will often include incentives in their leasing arrangements. For example, a lessee may be given a cash payment upon signing the lease or may be given several months of free rent....

www.wikihow.com

 

[DrStrangeLove]

I get treating the free rent period as a sales inducement. But that method assumes that the rent is calculable in advance. How would you apply it for percentage rent, since the lease in question is a commercial lease? Would you assume that sales stay below the break point for the term of the lease?

 

[kirby]

That would work as far as I could tell.