Short and long-term classification of certain assets and liabilities (Part II)
In a classified balance sheet, current (short-term) and non-current (long-term) assets and liabilities are presented separately. In most cases current assets and liabilities are easy to distinguish and don’t present any issues with their classification and presentation on a balance sheet. However, there are certain items which may require special treatment because they need to be separated into the current and non-current portions. In the second part of this article we will discuss two items: deferred rents and notes payable.
1. Current and non-current portions of deferred rents
Note: This is the second part of the two-part article. For the first part, refer to Short and long-term classification of certain assets and liabilities (Part I).
The deferred rents balance represents a deferred rent liability resulting from straight-lining lease expense for the company’s office rent. The entire balance of $153 is included in current liabilities on the balance sheet. The following information pertains to the lease:
Lease start date |
6/1/20X3 |
Lease end date |
5/31/20X6 |
Lease term |
3 years (36 months) |
Lease
payments: |
|
Lease classification |
Operating lease |
The lease payments increase over the lease term, so they represent escalating lease payments. According to US GAAP, lease expense under such lease agreements should be recorded on a straight-line basis. For more information about this topic, refer to article on accounting for escalating lease payments or rent holidays.
As shown in the table below, the total lease expense over the lease term will be $900. This implies that the average monthly lease expense is $25 (i.e., 900 ÷ 36 months). The difference between the monthly lease expense and monthly lease payment represents deferred rents. Deferred rents in our example have a credit balance and thus are recorded as a liability. The following table presents monthly lease expenses and deferred rents for the lease term:
Date |
Month |
Rent |
Rent |
Monthly |
Cumulative |
Jun 20X3 |
1 |
$25 |
$0 |
$25 |
$25 |
Jul 20X3 |
2 |
25 |
0 |
25 |
50 |
Aug 20X3 |
3 |
25 |
0 |
25 |
75 |
Sep 20X3 |
4 |
25 |
0 |
25 |
100 |
Oct 20X3 |
5 |
25 |
0 |
25 |
125 |
Nov 20X3 |
6 |
25 |
0 |
25 |
150 |
Dec 20X3 |
7 |
25 |
22 |
3 |
153 |
Jan 20X4 |
8 |
25 |
22 |
3 |
156 |
Feb 20X4 |
9 |
25 |
22 |
3 |
159 |
Mar 20X4 |
10 |
25 |
22 |
3 |
162 |
Apr 20X4 |
11 |
25 |
22 |
3 |
165 |
May 20X4 |
12 |
25 |
22 |
3 |
168 |
Jun 20X4 |
13 |
25 |
30 |
(5) |
163 |
Jul 20X4 |
14 |
25 |
30 |
(5) |
158 |
Aug 20X4 |
15 |
25 |
30 |
(5) |
153 |
Sep 20X4 |
16 |
25 |
30 |
(5) |
148 |
Oct 20X4 |
17 |
25 |
30 |
(5) |
143 |
Nov 20X4 |
18 |
25 |
30 |
(5) |
138 |
Dec 20X4 |
19 |
25 |
30 |
(5) |
133 |
Jan 20X5 |
20 |
25 |
30 |
(5) |
128 |
Feb 20X5 |
21 |
25 |
30 |
(5) |
123 |
Mar 20X5 |
22 |
25 |
30 |
(5) |
118 |
Apr 20X5 |
23 |
25 |
30 |
(5) |
113 |
May 20X5 |
24 |
25 |
30 |
(5) |
108 |
Jun 20X5 |
25 |
25 |
34 |
(9) |
99 |
Jul 20X5 |
26 |
25 |
34 |
(9) |
90 |
Aug 20X5 |
27 |
25 |
34 |
(9) |
81 |
Sep 20X5 |
28 |
25 |
34 |
(9) |
72 |
Oct 20X5 |
29 |
25 |
34 |
(9) |
63 |
Nov 20X5 |
30 |
25 |
34 |
(9) |
54 |
Dec 20X5 |
31 |
25 |
34 |
(9) |
45 |
Jan 20X6 |
32 |
25 |
34 |
(9) |
36 |
Feb 20X6 |
33 |
25 |
34 |
(9) |
27 |
Mar 20X6 |
34 |
25 |
34 |
(9) |
18 |
Apr 20X6 |
35 |
25 |
34 |
(9) |
9 |
May 20X6 |
36 |
25 |
34 |
(9) |
0 |
Total |
900 |
900 |
0 |
The last column in the table shows the cumulative deferred rent liability. As of December 20X3, the deferred rents balance was $153 (highlighted in light blue). This amount will continue to grow until June 20X4 - when the monthly deferred rent will change to a negative $5 and the cumulative deferred rent liability will start decreasing. By December 20X4 the deferred rents balance will decrease to $133. So, over the 12 months after the balance sheet date $20 (i.e., $153 - $133) of deferred rent balance will be liquidated (“used”). This $20 represents the current portion of deferred rent liability. The monthly deferred rents over the 12 months period which comprise the $20 are highlighted in light orange in the table.
The monthly deferred rent amounts after December 20X4 represent the non-current (long-term) portion of the deferred rent liability because they will not be liquidated (“used”) within the 12 months after the balance sheet date. The total of such amounts is $133 and these amounts are highlighted in light green in the table above.
To summarize, the 12/31/20X3 deferred rent balance of $153 should be split into the current portion (i.e., $20) and non-current portion (i.e., $133) and an adjustment should be made on the balance sheet.
The balance sheet with this adjustment is presented below. Note that a new element is now shown on the balance sheet for the long-term portion of the deferred rent liability. This element is presented after the long-term note payable line and is titled Other Liabilities (highlighted in yellow on the balance sheet below):
Friends
Company |
|
ASSETS |
|
Current assets: |
|
Cash and cash equivalents |
$3,300 |
Accounts receivable |
2,900 |
Inventories |
2,600 |
Prepaid expenses |
48 |
Total current assets |
8,848 |
Property, plant and equipment: |
|
Buildings |
5,000 |
Machinery, equipment |
8,720 |
Less: Allowance for depreciation |
(5,500) |
Property, plant and equipment (net) |
8,220 |
Other assets |
76 |
Total Assets |
17,144 |
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
Current liabilities: |
|
Accounts payable |
1,600 |
Accrued expenses |
1,200 |
Income taxes payable |
900 |
Deferred rents |
20 |
Total current liabilities |
3,720 |
Long-term note payable |
3,953 |
Other liabilities |
133 |
Stockholder's equity: |
|
Common stock |
1,000 |
Paid-in capital |
1,850 |
Retained earnings |
6,488 |
Total stockholder's equity |
9,338 |
Total Liabilities and stockholder's equity |
17,144 |