On January 1, 2017, Metlock Co. leased a building to Ivanhoe Inc. The relevant i

Question

On January 1, 2017, Metlock Co. leased a building to Ivanhoe Inc. The relevant information related to the lease is as follows. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,000,000 (unguaranteed). The leased building has a cost of $3,500,000 and was purchased for cash on January 1, 2017 The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $270,000 per year and are made at the beginning of the year Ivanhoe has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Ivanhoe Both the lessor and the lessee are on a calendar-year basis. 1. 2. 3. 4. 5, 6.

Explanation / Answer

Right to Use Asset - $40, 000

Journal Entries in the books of Metlock Co. Debit Credit 1-Jan Buildings    3,500,000.00 To Cash    3,500,000.00 1-Jan Bank        270,000.00 To Ivanhoe        270,000.00 31-Dec Ivanhoe        270,000.00 to Lease Revenue        270,000.00 31-Dec Depreciation $      70,000.00 To Accumulated Depreciation          70,000.00

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