Question

n January 1, 2017, Nelson Co. leased a building to Wise 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 $3,500,000 (unguaranteed).

2.The leased building has a cost of $4,000,000 and was purchased for cash on January 1, 2017.

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 $275,000 per year and are made at the beginning of the year.

5.Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise.

6.Both the lessor and the lessee are on a calendar-year basis.

Instructions

(a)  

Prepare the journal entries that Nelson should make in 2017.

(b)  

Prepare the journal entries that Wise should make in 2017.

(c)  

If Wise paid $30,000 to a real estate broker on January 1, 2017, as a fee for finding the lessor, how much should Wise report as an expense for this item in 2017?

Answer 1

Journal Entry in the Books of Nelso Co.
Date	Particular	Debit	Credit
01/01/2017	Building	$4,000,000
	Cash		$4,000,000
	To Record Purchase of Building
01/01/2017	Cash	$275,000
	Unearned Lease Revenue		$275,000
	To Record Receipt of Lease Payment
31/12/2017	Unearned Lease Rent	$275,000
	Lease Revenue		$275,000
	To Record Recognition of the Revenue
31/12/2017	Depreciation Expense ($4000,000/50)	$80,000
	Accumulated Depreciation-Building		$80,000
	To Record Depreciation

Journal Entry in the Books of Wise Inc.
Date	Particular	Debit	Credit
01/01/2017	Right of Use Asset ($275000*10)*PVFIA @8%, 10	$1,845,250
	Lease Liability		$1,845,250
	To Record Lease
01/01/2017	Lease Liability	$275,000
	Cash		$275,000
	To record Lease Liability
31/12/2017	Lease Expense	$275,000
	Right of Use Asset		$149,380
	Lease liability ($1845250-275000)*8%		$125,620
	To Record Lease expense and reduction of Lease Laibility

c) The Real Estate Broker Fees will be amortised Equally over the period of 10 Year. Hence Real Estate Fee Expense will be ($30000/10)=$3000    reported in Each period