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February 22, 2011
The Facts: A retailer enters into a 5 year lease which, in addition to fixed monthly payments, calls for contingent rents to be paid at a rate of 1% of annual sales in excess of $1M. Contingent rents are to be paid at the end of each year of the lease. Based on past performance and future projections, management prepares the following analysis related to estimated forecasted sales. The retailer’s incremental borrowing rate is 10%. As a result of the foregoing analysis, the retailer would include contingent rent of $39,221 in its estimate of lease payments. The present value of estimated yearly payments is $7,844 ($39,221/5).
Simplified Approach – Example
The Facts: A lessee enters into a 12 month lease for storage space; the lease requires monthly payments of $1,000. The lessee elects to account for the lease using the simplified approach. Based on the fact pattern, the lessee would record the following entries: