On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The r
ID: 2468058 • Letter: O
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. The lease arrangement is for 10 years. The leased building cost $4,491,000 and was purchased for cash on January 1, 2014. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $263,530 per year and are made at the end of the year. Property tax expense of $86,250 and insurance expense of $11, 200 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year. Both the lesser and the lessee are on a calendar-year basis. Prepare the journal entries that Nelson Co. should make in 2014. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Prepare the journal entries that Wise Inc. should make in 2014. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) If Nelson paid $26,170 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.?Explanation / Answer
(a) Entries for Doug Nelson are as follows:
1/1/2014
Building.............................................................DR $4 ,491,000
Cash...................................................................CR $4 ,491,000
12/31/2014
Cash .................................................DR $263,530
Rental Revenue .......................................CR $263,530
Depreciation Expense.......................................DR $89,820
Accumulated Depreciation óBuilding..................CR $89,820 ($4 ,491,000/ 50)
Property Tax Expense .....................................DR $86,250
Insurance Expense...........................................DR $11,200
Cash......................................................... CR $97,450
(b) Entries for Patrick Wise are as follows:
12/31/2014
Rent Expense..........................................DR $263,530
Cash......................................................... CR $263,530
(c) The real estate brokerís fee should be amortized equally over the 10-year period. As a result, real estate fee expense of $2617 ($26,170/10) should be reported in each period.
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