General Business Question, Audit?

Question

A business decides to rent instead of buying property. They pay an advance rent of $5 million dollars for the initial period of 5 years. The entire amount is recorded as an asset in the form of prepaid expense. When questioned by auditors, their response: “An asset is just an expense waiting to happen.” Discuss the validity and implications of this statement.

Answer 1

Any time you make a payment for an expense which covers more than one year you must treat that portion of the amount which is more than 12 months as a prepaid expense and carry it on your balance sheet as a prepaid expense.  In your example $4 million would be carried as prepaid expense and written off over the next 4 years.