USA Leasehold Improvements - GAAP - Various Examples

[accountmein]

Hi All,

Have a few lease accounting questions that I need help with.

In all examples below, we are the Lessee (we are leasing from a building owner).

1. the Heater broke and needed to be replaced with a new one. The Landlord said we can reduce our next Rent check to him to offset the bill for the Heater. How should this be accounted for under GAAP?


2. If smaller items break, such as light bulbs, door knobs, ect (repair and maintenance items), and the Landlord tells us to Pay for the costs on our own then Deduct the costs from next month's rent check, how should I account for this?


3. If we sign a new lease or extend an existing lease, and the Landlord agrees in the contract to pay for 40% of the costs, how do we account for this? Would we have to record the 40% paid be the landlord as a Lease Obligation an amortize it?


4. If during our lease, the Air Conditioner needs to be replaced, and we contact the landlord, who agrees to pay 40% (not previously agreed upon in the lease agreement), how do we account for this?


Thanks in advanced for your advice

 

[kirby]

1 and 2 are the same. You pay for a cost in lieu of rent and reduce rent. The total of both equals the monthly rent. So I would just record the "in lieu" costs to the 'RENT" account rather than have miscellaneous expenses all over the income statement.
3. 40% of the costs for what? The common area costs?
4. Really lost on this one. In item 1, you needed a heater and landlord paid 100% Now you need an air conditioner and landlord pays only 40%? I'm lost.

AND in all this - note that landlord is a genius! He has you finding, buying, financing equipment and he does not have to hire anyone to do all this cause you are doing it. Bravo landlord!

 

[Scramble!]

Presumably this is an operating lease (e.g. you are renting the space, not buying it over time). In question 4, if the landlord agreed to pay 40% of the cost, leaving the remaining 60% to you, you would simply depreciate your portion of the cost over the remaining lease term. This presumes that when you leave, the landlord gets to keep the new air conditioner and doesn't give you any money back for its remaining life. For example,

Assuming the new air conditioner cost $10,000 and has an economic life of 10 years. Your remaining lease term is three more years. The economic life is not relevant to you (although it would be to the landlord).

Upon purchase
DR Leased Air Conditioner $6,000 (asset account)
CR Cash $6,000

At the end of each year
DR Depreciation Expense $2,000
CR Accumulated Depreciation $2,000 (contra-asset account to the air conditioner asset account)

Unfortunately, that is the way most business leases operate. You are using the space, so you are on the hook for taxes, insurance, and maintenance costs (in addition to the base rent), although in some cases those costs (or a portion of them) are bundled into a higher rent expense rather than being separately accounted for.