Question

On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement:

1.	The agreement requires rental payments of $100,000 at the beginning of each year.
2.	The cost and fair value of the building on January 1, 2019, is $2 million. The storage building has not been specialized for Caswell.
3.	The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method.
4.	The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor.
5.	Caswell’s incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate.
6.	Executory costs of $7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year.

Required:

Prepare appropriate journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020. Need journal entry from Jan. 1 of the 1st year through Dec. 31 of 2nd year.

CHART OF ACCOUNTS

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
190	Right-of-Use Asset

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
253	Lease Liability
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
513	Rent Expense
514	Lease Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Tax Expense

Answer 1