Question

Bubble Co leased a machine from Balloon Co for 5 years commencing on 1 January 20X1....

Bubble Co leased a machine from Balloon Co for 5 years commencing on 1 January 20X1. Bubble Co is required to make annual payments of $500, however as an incentive, Balloon Co has provided an initial six month rent free period. Balloon Co classifies the lease as an operating lease. What lease income should Balloon Co recognise in the year ended 31 December 20X1? $500

$450

$250

$600

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Answer #1

Annual lease payments = $500

Lease period = 5 years

As an incentive, Balloon Co has provided an initial six month rent free period.

Hence, for the first year, lease payment will be made for 6 months only.

Lease payment for first year = 500 x 1/2

= $250

Lease payment for remaining four years = Annual lease payments x 4

= 500 x 4

= $2,000

Total lease payments for 5 years = Lease payment for first year + Lease payment for remaining four years

= 250 + 2,000

= $2,250

Lease income per year = Total lease payments for 5 years/5

= 2,250/5

= $450

Balloon Co should recognise lease income in the year ended 31 December 20X1 = $450

Second option is correct.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.

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