Question

On January 1, 2019, Marshall Company (MC) signs a 10-year agreement to lease a standard non-specialized storage building from Hammer, Inc. The following information pertains to this lease agreement: a. The agreement requires rental payments of $120,000 at the beginning of each year. b. The carrying value of the building on January 1, 2019 is $2 million. c. The fair value of the building on January 1, 2019 is $2.5 million. d. The building has a remaining estimated economic life of 50 years, with no residual value. Hammer depreciates similar buildings using the straight-line method. e. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. f. MC’s incremental borrowing rate is 14% per year. Hammer has set the annual rental payments to ensure an 11% rate of return (this rate is disclosed in the lease agreement). g. Executory costs are $25,000 annually, related to taxes on the property and maintenance, and will be paid by Hammer on October 1 each year. h. Both entities have fiscal year-ends on December 31 and have adopted ASC 842. Instructions a) List each Group I lease classification criteria and determine the appropriate lease accounting treatment for both MC and Hammer. b) Provide journal entries for both MC and Hammer in 2019

Answer 1