Under ASC 842 (Leases), the accounting for subleases depends on whether the sublease is classified as a finance lease, operating lease, or sales-type lease for the sublessor (the original lessee). Here, I’ll provide the general journal entries for the important of sublease transactions.
Sublease as Operating Lease (Most Common Scenario)
When a sublease is classified as an operating lease, the original lessee (now the sublessor) still retains its original lease with the lessor but leases the leased asset to another party. Here are the main journal entries:
1. Recognition of Sublease Income:
If the sublessor receives monthly payments from the sublessee, it will record sublease revenue each time rent is received.
Journal Entry for Sublease Rent Receipts:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Bank A/c Debit | X,XXX | |
| 09/06/2024 | To Sublease Income (P&L) A/c | X,XXX |
2. Payment to the Original Lessor:
The sublessor (original lessee) must still make payments to the original lessee under the head lease agreement.
Journal Entry for Payments to the Lessor:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Lease Expense A/c Debit | X,XXX | |
| 09/06/2024 | To Bank A/c | X,XXX |
Sublease as Finance Lease (for Sublessor)
If the sublease qualifies as a finance lease for a sublessor (ie substantially all risks and rewards are transferred to the sublessee), accounting follows a different approach.:
1. Recognition of Lease Receivable and Derecognition of ROU Asset:
The sublessor will derecognize the portion of the right-of-use (ROU) asset related to the sublease and recognize a lease receivable.
Journal Entry at Sublease Commencement:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Lease Receivable A/c Debit | X,XXX | |
| 09/06/2024 | To Right-of-Use Asset (ROU) A/c | X,XXX |
2. Recognition of Interest Income:
The sublessor will recognize interest income over time based on the lease receivable.
Journal Entry for Interest Income:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Lease Receivable A/c Debit | X,XXX | |
| 09/06/2024 | To Interest Income (P&L) A/c | X,XXX |
3. Receipt of Lease Payments from Sublessee:
When the sublessee makes payments, the sublessor reduces the lease receivable.
Journal Entry for Receipt of Lease Payments:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Bank A/c Debit | X,XXX | |
| 09/06/2024 | To Lease Receivable A/c | X,XXX |
Sublease as Sales-Type Lease
If the sublease qualifies as a sale-type lease (transfers control of the asset under the lease to the sublessee), the sublessee will derecognize the entire ROU asset and recognize a net investment in the lease.
1. Derecognition of ROU Asset and Recognition of Net Investment in Lease:
Journal Entry at Sublease Commencement:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Net Investment in Lease A/c Debit | X,XXX | |
| 09/06/2024 | To Right-of-Use Asset (ROU) A/c | X,XXX |
2. Recognition of Selling Profit (If Any):
If there is a selling profit, the sublessor will recognize the profit at lease commencement.
Journal Entry for Profit:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Lease Receivable A/c Debit | X,XXX | |
| 09/06/2024 | To Selling Profit (P&L) A/c | X,XXX |
3. Receipt of Lease Payments:
As payments are received, the sublessor reduces the net investment in the lease.
Journal Entry for Lease Payments:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Bank A/c Debit | X,XXX | |
| 09/06/2024 | To Net Investment in Lease A/c | X,XXX |
Key Considerations
- The classification of sublease (operating, finance,, or sale-type) depends on the terms of the lease and the transfer of risks and rewards. This determination is made at the beginning of the lease.
- Right-of-use (ROU) assets and lease liabilities must be tracked separately for the head lease and the sublease.