Question

Carla Vista Corp. agreed to lease property from Sunland Corp. effective January 1, 2020, for an annual payment of $25,592, beginning January 1, 2020. The property is made up of land with a fair value of $104,000 and a two-storey office building with a fair value of $170,000 and a useful life of 25 years with no residual value. The implicit interest rate is 9%, the lease term is 25 years, and title to the property is transferred to Carla Vista at the end of the lease term. Prepare the required entries made by Carla Vista Corp. on January 1, 2020, and at its year end of December 31, 2020. Both Carla Vista and Sunland use ASPE.

(Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Answer 1

The lease transfers title to the lessee at the end of the lease term.

The present value of the minimum lease payments is calculated as follows:

$25,592 x factor for PV of annuity,

25 payments @ 9% $25,592 x 9.8226 = $251380

The present value of the minimum lease payments is then prorated between the land and building components on the basis of their relative fair values, as follows:

Land = $251,380 ($104,000/$274,000)

= $95,414

Building = $251,380 ($170,000/$274,000)

= $155,966

The building component will be amortized over its estimated useful life, using the lessee's usual depreciation methods. The land component will not be amortized.

Jan 1, 2020	Land & Building A/c	$251380
	To Lease liability		$251380
Dec. 31, 2020	Lease liability	$249,340
	Interest expense ($274,000 × 9%)	24,660
	Cash		$274,000
Dec. 31,2020	Depreciation A/c
	To accumulated depreciation