On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The r

Question

On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

(a) Prepare the journal entries that Nelson Co. should make in 2014.

(b) Prepare the journal entries that Wise Inc. should make in 2014.

(c) If Nelson paid $34,310 to a real estate broker on January 1, 2014, as a fee for finding the lessee, how much should be reported as an expense for this item in 2014 by Nelson Co.?

1. The lease arrangement is for 10 years. 2. The leased building cost $4,749,000 and was purchased for cash on January 1, 2014. 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 $296,140 per year and are made at the end of the year. 5. Property tax expense of $85,470 and insurance expense of $10,840 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year. 6. Both the lessor and the lessee are on a calendar-year basis.

Explanation / Answer

From the terms of the lease, it is clear that it is a operating lease.

Answer for question no.a):

Answer for question no.b):

Date Entry Debit Credit Remarks For purchase of building 1-Jan Building a/c   Dr $4,749,000.00 To Cash a/c Cr $4,749,000.00 (Being building purchased by paying cash) For depreciation expesne 31-Dec Depreciation expense a/c Dr $94,980.00 Depreciation is calculated on straight line basis.ie., Book value- Salvage value/Life of the asset. $4749000/50 =$94,980 To accmulated depreciation a/c Cr $94,980.00 (Being depreciation expense recorded for the year) For lease rental 31-Dec Cash a/c Dr $296,140.00 To Lease rental income a/c Cr $296,140.00 (Being lease rental income received) For payment of property tax and insurance 31-Dec Property tax expense a/c Dr $85,470.00 Insurance expense a/c Dr $10,840.00 To cash a/c Cr $96,310.00 (Being property expense and insurance expense paid for the year)

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