Final answer:
The rent expense Applewood Corp should report for the year ending 12/31/22 is $17,250, which includes 5 months of rent payments at $2,400 per month and the prorated portion of the nonrefundable lease fee for the same period.
Step-by-step explanation:
The question involves determining the proper rent expense Applewood Corp should report in its income statement for the year ended 12/31/22. As the lease started on 7/31/22 and is a 10-month agreement with a $10,500 nonrefundable fee and a monthly rent of $2,400, we need to calculate the total lease expense that pertains to the current financial year.
Applewood Corp would have paid rent for 5 months within the 2022 financial year (August to December). To find the rent expense for 2022, we multiply the monthly rent by the number of months:
Monthly rent: $2,400
Number of months: 5
Total rent for 2022: $2,400 x 5 = $12,000
Since the nonrefundable fee is associated with acquiring the lease, it is part of the initial direct costs and should be spread over the lease term. However, for the income statement of the period ending 12/31/22, only a portion of this fee applies—specifically, the portion that covers the lease period within this fiscal year. As the lease is for 10 months, the portion of the nonrefundable fee for the 2022 fiscal year is:
Total nonrefundable fee: $10,500
Lease term: 10 months
Portion of the nonrefundable fee for 5 months: ($10,500 / 10) x 5 = $5,250
Adding the nonrefundable fee allocated to the 2022 fiscal year to the rent paid gives us the total rent expense:
Total rent expense for 2022: $12,000 (rent) + $5,250 (fee portion) = $17,250
Therefore, in Applewood's income statement for the year ending 12/31/22, the rent expense should be $17,250.