I have an interesting situation. We are entering into a lease where the Landlord, at their sole expense, is making improvements and alterations to the premises which will be funded by a loan, a one time payment of $300k by us, the lessee, upon Lease commencement. Then the Landlord shall credit us, the Tenant, a monthly amount against the base rent, that is made up of the principal and interest of that $300K across the 72 months of the lease. How should this be accounted for as the Tenant? Thank you
Accounting for Leasehold improvement with loan from lessee to lessor
Answers
Based on the fact that you have a lease in place that should breakout your rent expense over the term of the lease, including any escalations, you should break the two items (loan and rent) into two separate items.
With the rent, calculate the total rent expense per the lease and then using a deferred rent account on your balance sheet, straight line the rent over the life of the lease. Your total rent expense will tie out to the lease agreement.
As for the $300K loan, record the cash out and record your loan receivable.
When you pay the rent each month, you will have several transactions:
The check that you issue to the landlord will be the net amount of your monthly payment less the amount of principal and interest deduction for the loan.
Accountingwise, you will record your monthly payment to rent expense with any appropriate adjustment for the deferred rent. The deduction for the "payment and interest" from the landlord will be broken out as a paydown to principal and interest income.
The result is that you reflect the correct rent expense and the correct amounts for the loan paydown and the interest expense.
Since you are not paying for the leasehold improvements, they do not get recorded as fixed assets, nor are they depreciated/amortized on your books.
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Accounting