“It’s Just Rent,” Said the CEO.
A new London office, three rent-free months and a CEO convinced none of this is debt. The auditor disagrees.
01The situation
BrightFox Technologies has just moved into its new office. The lease runs for five years and, to mark the opening, the landlord has granted three rent-free months.
Emma, the CFO, opens the contract. She sees the term, the rent-free period and a clause she hadn’t read carefully.
| Lease term | 5 years |
|---|---|
| Monthly payment, in arrears | £8,000 |
| Months 1–3 | Rent-free |
| Incremental borrowing rate | 6% effective annual |
| Initial direct costs | £12,000 |
| Purchase option | No |
| Residual value guarantee | No |
02Your mission
Close the month without sweeping the problem under the rug.
- Determine the initial lease liability.
- Calculate the right-of-use asset.
- Work out the first-year interest expense.
- Calculate depreciation of the right-of-use asset.
- Prepare the main journal entries.
- Explain what changes in EBITDA and on the balance sheet.
03Think first
What would you do?
Every case asks for your answer before it shows you the solution. Getting it wrong here is part of the method.
04The solution
This is how the solution starts. The rest is in the full case.
Liability, asset, journal entries, the 60-month schedule and the EBITDA impact.
Unlock for $9.90What’s included
Everything you need to solve it.
- PDF caseThe story, the facts and the questions.
- Excel modelMonthly liability schedule with visible formulas.
- Complete solutionStep-by-step reasoning, not just the final number.
- Journal entriesInitial recognition, interest, payments and depreciation.
- Common mistakesThe ones Leo would make. And probably you too.
- Final challengeA lease modification to test yourself.
WHAT YOU’LL PRACTICE
Preview
A look inside.
- p. 1Cover
- p. 3The Case
- p. 7The Solution
- p. 10Journal Entries
In this case
- Mike, CEOWants to know if this affects EBITDA.
- Emma, CFOFinds the clause nobody read.
- Sarah, AuditorAsks the right question first.
- Leo, Junior AccountantWould book £8,000 of rent every month.
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