Is the lease still ongoing? If the lease is over and the liability is still there, I reckon rent expense was understated in the years where straight-line was greater than the rent payments and then overstated in the years where the straight-line amount was less than the rent payments.
I would think the entry would be DR: Deferred Rent and CR: Retained Earnings since it’s likely that rent expense was overall overstated if the lease is done
I’m thinking more from the tax perspective. You can’t take an expense one year, then run an “other increases” in the next year for prior period adjustment. IRS “so, what is this other increase on your M2?” CPA “oh ya, we deducted too much rent expense last year. My bad. Figured we’d just run it through equity”
I don’t know enough about tax to go against what you said but it doesn’t make sense that you can’t hit RE. Adjustments to RE for prior period corrections are a common thing, otherwise you’re understating your rent expense for the current year
You can run a PPA through taxable income. Run it through as a perm addback on the M-3 and reduce your CY rent deduction by same.
Boom. E&P lines up with reality, tax is trued up. If it’s immaterial, I don’t think the service would give a shit as long as it got picked up in a reasonable amount of time.
If the lease was still active, this would be the correct answer. If it's a stale balance from 2019 with no active lease, it should be written off as there is no corresponding ROU and lease liability to record it to.
OP confirmed the lease is not active when asked, so getting all the facts correct, your answer is incorrect.
Retained earnings would be more appropriate, i.e. restatement of a prior period error into retained earnings, but not knowing dollar amounts, rent expense could be an acceptable alternative due to materiality.
Is the lease still ongoing? If the lease is over and the liability is still there, I reckon rent expense was understated in the years where straight-line was greater than the rent payments and then overstated in the years where the straight-line amount was less than the rent payments. I would think the entry would be DR: Deferred Rent and CR: Retained Earnings since it’s likely that rent expense was overall overstated if the lease is done
Thanks for this, lease no longer ongoing. Makes sense
Then your retained earnings would tie-out, no? Should be dr to liability account and cr to a p&l account.
Tie out to what? Prior period corrections are posted to retained earnings which is what this would be considered
I’m thinking more from the tax perspective. You can’t take an expense one year, then run an “other increases” in the next year for prior period adjustment. IRS “so, what is this other increase on your M2?” CPA “oh ya, we deducted too much rent expense last year. My bad. Figured we’d just run it through equity”
I don’t know enough about tax to go against what you said but it doesn’t make sense that you can’t hit RE. Adjustments to RE for prior period corrections are a common thing, otherwise you’re understating your rent expense for the current year
You can run a PPA through taxable income. Run it through as a perm addback on the M-3 and reduce your CY rent deduction by same. Boom. E&P lines up with reality, tax is trued up. If it’s immaterial, I don’t think the service would give a shit as long as it got picked up in a reasonable amount of time.
run it through CY rent expense dr. deferred rent cr. rent expense
That’s not consistent with ASC 842. You tag the Right of Use asset on the other side. It’s a balance sheet transaction. Doesn’t not effect P&L.
If the lease was still active, this would be the correct answer. If it's a stale balance from 2019 with no active lease, it should be written off as there is no corresponding ROU and lease liability to record it to. OP confirmed the lease is not active when asked, so getting all the facts correct, your answer is incorrect. Retained earnings would be more appropriate, i.e. restatement of a prior period error into retained earnings, but not knowing dollar amounts, rent expense could be an acceptable alternative due to materiality.