Question

A landlord agrees to pay the last two months of a tenant’s existing lease with another party as an inducement to have the tenant sign a lease for one of its properties. The tenant needs to understand how to account for this payment.

Identify a single researchable question for this issue.

Answer 1

The above question is a case of lease inducement they are made by the landlord to attract tenants , it can either be something of value in exchange or any specific payments made on tenant's behalf.

Lease inducements are considered to be a part of lease agreements, therefore, it can be accounted over the entire term of the lease-

On the Lessee's books

1) To recognize the loss it has over accepting the new lease and foregoing the old one-

(Debit) Loss on lease assumed

(Credit) Incentive from Lessor

Loss on lease assumed will be treated in P&L allocation account as it is a charge against profit, whereas Incentive from lessor is a liability and will be amortized with the rental payments.

2) The lease inducement will be amortized within the lease period and the recording of lease payment -

(Debit) Incentive from Lessor [Inducement amount/Terms of new lease]

(Debit) Rental expense (Paid on new lease)

(Credit) Cash account