Taken from becker:

Wall Co. leased office premises to Fox, Inc. for a five-year term beginning Jan 2, 1992.  under the terms of the operating lease, rent for the first year is $8,000 and rent for years 2 through 5 is $12,500 per annum.  However, as an inducement to enter the lease, Wall granted the first six months of the lease rent-free.  In its Dec 31, 1992 income statement, what amount should Wall report as rental income?

A – XXX

B – 11,600

C – 10,800

D – XXX

I crossed off A and D as those were just plan stupid.  Though I answered B seeing as how ‘under the term of the lease’ first year rent is 8,000.  Though they fail to mention that to get the correct answer, we should reduce the 8,000 by half, to account for the ‘free’ months.

Just me pointing out that doing this in real life is sometimes easier than trying to figure out what they mean to ask in these questions.

On the first go, I took $8,000 as rent for six months and calculated the answer as $11,600.....

aaahhhhhhh !! I should have judged that $8,000 is p.a. and since the first six months were free, Fox Inc. would have only paid $4,000.

Thus, after spreading out the total rent for 5 years, the correct answer becomes $10,800 - option C.

It becomes very important to read the question very carefully, take extra precaution about the dates, and whether any amount is p.a. or.... Conceptually, we know the question but do wrong as we miss the tricky part....

see, I thought on my first read that the 8000 was the amount including the 6 months 'free'.  So the first year would have actually been 16000 if there wasn't free rent.

I think they should have written, rent for the first year would have been 8000 and .....yada yada yada...by placing is in the sentence it's telling me thats what they are on the hook for.  It's like talking to someone about realize vs recognize, yeah they sound the same but they mean totally different things.

I guess because it says first year we are to assume that the discount would not have been figured in yet.

Could someone explain the calculation for 10,800? Like show the math. I thought the total amount was supposed to be allocated over the 5 years. What does Becker say is the right answer?

I got (8,000+(12,500*4))/5=11,600