ABC Inc. has just entered into the business ofselling antique cars. The company
ID: 2502236 • Letter: A
Question
ABC Inc. has just entered into the business ofselling antique cars. The company management decided to lease thepremises for the business instead of buying the office premises.They ended up paying an advance rent of $5 million dollars for theinitial period of 5 years. The entire amount was recorded as anasset in the form of prepaid expense. When questioned by theauditors, the CFO of ABC Inc. mentioned “An asset is just anexpense waiting to happen.” Discuss the validity andimplications of this statement.Explanation / Answer
It is assumed that the given lease is a capital Lease.
In that case the advance lease payments should not be shown asPrepaid Expense.
.
The advance lease payments pertaining to the next5years should be shown as long term assets.