Question

Exercise 21-17 (Part Level Submission)

On January 1, 2020, Marin Co. leased a building to Cullumber Inc. The relevant information related to the lease is as follows.

1.		The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $2,900,000 (unguaranteed).
2.		The leased building has a cost of $3,400,000 and was purchased for cash on January 1, 2020.
3.		The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
4.		Lease payments are $255,000 per year and are made at the beginning of the year.
5.		Cullumber has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Cullumber.
6.		Both the lessor and the lessee are on a calendar-year basis.

a.  

Prepare the journal entries that Nelson should make in 2020.

b.  

Prepare the journal entries that Wise should make in 2020.

Answer 1

Given, Marin Co leased a building to Cullumber Inc for 10 years, while the useful life of the building is 50 years

The building has been leased for 20% [(10/50)*100] of useful life which is less than 75% of useful life to be classified as a Finance lease. So, the lease is classifiesd as an operating Lease.

The present value factor for 10 years , 8% = 7.24689

So the present value of lease payments = $255,000 * 7.24689 = $1,847,957

a.  Prepare the journal entries that Marin Co should make in 2020.

Journal Entries in the books of Marin Co For the year 2020
Date	Particulars	Debit	Credit
Jan 1,2020	Buildings A/c	$3,400,000
	Cash A/c		$3,400,000
	[To record purchase of Buildings
Jan 1,2020	Cash A/c	$255,000
	Unearned Lease Revenue A/c		$255,000
	[To record the receipt on leased buildings
Jan 31,2020	Unearned Lease Revenue A/c	$255,000
	Lease Revenue A/c		$255,000
	[To recognise the revenue on leased buildings
Jan 31,2020	Depreciation Expense A/c. ($3,400,00 /50)	$68,000
	Accumulated Depreciation A/c - Leased Buildings		$68,000
	[To record depreciation on leased buildings]

a.  Prepare the journal entries that Cullumber Inc should make in 2020.

Journal Entries in the books of Cullumber Inc For the year 2020
Date	Particulars	Debit	Credit
Jan 1,2020	Right of Use Buiding A/c (255,000 * 7.24689)	$1,847,957
	Lease Liability		$1,847,957
	{to record right of use of building
Jan 1,2020	Interest Expense A/c ($1,847,957 * 8%)	$147,836
	Lease Expense A/c ($255,000 - $1847,957)	$107,164
	Cash A/c		$255,000
	[To record payment made for leased building
Dec 31,2020	Lease Liability A/c	$255,000
	Right of Use Asset A/c		$255,000
	[To decrease the liability of the building to the extent paid]