Laurel Ltd

question 41

Multiple Choice

Laurel Ltd. leased an office building to Hardy Inc. for a three year, non-renewable term. This was properly classified as an operating lease by both parties. The monthly rental is set at $ 12,000 per month. However, as an added inducement, Laurel agreed to grant Hardy a four-month rent-free period at the beginning of the lease, and a further two-month rent-free period at the end of the lease. How much rent expense should Hardy record each month during the three year period?

• A) $ 12,000
• B) $ 11,250
• C) $ 10,667
• D) $ 10,000

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Definitions:

Sunk Cost

Expenses that have been paid and cannot be retrieved, and therefore, should not impact upcoming business strategies.

Opportunity Cost

The benefit foregone by choosing one alternative over another.

Financing Costs

Expenses incurred by an entity in borrowing funds, including interest, fees, and other charges associated with the issuance of debt.

Incremental Cash Flow

The additional cash flow generated by a company from a new project or investment, after accounting for expenses.