When are refundable security deposits forfeited by the tenant considered rental income for the landlord?

• A. When the tenant forfeits the deposit by violating the lease agreement
• B. When the deposit is initially received from the tenant
• C. At the end of each accounting period regardless of tenant actions
• D. Only when the lease is renewed by the tenant

Answer: (A)

Verified step by step guidance

1. Understand the concept of refundable security deposits: These are amounts paid by tenants to landlords as a guarantee for fulfilling lease terms. They are typically held by the landlord and returned to the tenant if the lease terms are met.
2. Identify the conditions under which refundable security deposits are forfeited: Forfeiture occurs when the tenant violates the lease agreement, such as causing damage to the property or failing to pay rent.
3. Determine the accounting treatment for forfeited deposits: When a tenant forfeits the deposit, the landlord can recognize it as rental income because the deposit is no longer refundable and effectively becomes part of the landlord's earnings.
4. Clarify why the deposit is not considered rental income at other times: When the deposit is initially received, it is recorded as a liability (unearned revenue) because it is refundable. It does not become income until forfeited. Similarly, it is not recognized as income at the end of each accounting period or upon lease renewal unless forfeited.
5. Conclude that refundable security deposits are considered rental income for the landlord only when the tenant forfeits the deposit by violating the lease agreement.