How to calculate straight-line rent
Straight-line rent is the concept that the total liability under an operating lease should be charged to expense on an even periodic basis over the term of the lease. The concept is similar to straight-line depreciation, where the cost of an asset is charged to expense on an even basis over the useful life of the asset. The straight-line concept is based on the idea that the usage of a lease is on a consistent basis over time; that is, the leased asset is used at about the same rate from month to month.
To calculate straight-line rent. aggregate the total cost of all lease payments, and divide by the total lease term. The result is the amount to be charged to expense in each month of the lease. This calculation should include all discounts from the normal rent, as well as extra charges that can reasonably be expected to be incurred over the life of the lease.
The calculation of straight-line rent may result in a monthly rent expense that differs from the actual amount billed by the lessor. This is
usually because the lessor has built escalating lease payments into the lease agreement. In such a case, the straight-line amount charged to expense is higher than the actual amount billed during the first few months of the lease, and lower than the amount billed during the final months of the lease.
This initial disparity, where the amount of the expense is greater than the amount paid, is charged to a deferred liability account. The latter disparity, where the amount paid is greater than the amount of the expense, is a reversal of the accrued liability account. By the end of the lease, the accrued liability account will have a zero balance.
For example, a company enters into a short-term facility lease where the amount billed is $500 per month for the first six months, and $600 per month for the last six months. On a straight-line basis, the amount of rent is $550 per month. In the first month of the lease, the lessee would record a lease expense of $550 (debit), a cash reduction of $500 (credit), and an accrued liability of $50 (credit).