Lesson: Leases - Practice Questions

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, dives into the intricacies of lease accounting with a set of practice questions aimed at clarifying when to begin recognizing rental expenses and how to determine the value of leased equipment on a balance sheet. Through walking you through the thought process of handling operating lease scenarios and the placement of leased assets into service, Nick ensures clarity on accrual versus cash basis accounting. He then tackles a calculation-intensive example, methodically breaking down the factors that affect the present value of lease payments and residual values. Nick's approach demystifies complex lease accounting concepts, giving you practical tools to apply in real-world CPA exam questions, alongside the confidence to parse through the factors and costs involved.

Updated: June 18, 2024 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Welcome everyone to another group of exam prep.ai questions on leases. Let's jump right in and see what they've got for us here. We're talking about recognition of rental expense for new offices that you're leasing. When should that expense begin? When should the recognition of that expense begin? This is a combination of an accrual basis question as well as lease based question. Now my thought process here is what makes sense? What makes sense? When is it placed into use? Similarly to when you place equipment into use. Let's see. So on January 1st, a company enters into an operating lease for office space and receives control of the property and make leasehold improvements. Now first off, right off the bat, that sounds pretty solid. That sounds like a pretty solid date that we would use to begin our lease expenses because we have full control of it at that point. We can do whatever we want and maybe we don't move into it later, which we're going to see, but that's on us. That's not on us. You could pay for Netflix for six months and if you don't use it for the whole first month, it doesn't matter. That's on you. You're still going to have Netflix expense. So the company begins alterations to the property on March 1st and the company staff moves into the property on May 1st. Again, it doesn't matter. That's on the company. You're still going to recognize expense because you've been paying for it this whole time and you were able to use it. If you weren't able to use it, then that's a different story. All right. The monthly rental payments begin on July 1st. As we know, this is going to indicate more of a cash basis concept.

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