On January 1, 2017, Metlock Co. leased a building to Ivanhoe Inc. The relevant i
ID: 2521691 • Letter: O
Question
On January 1, 2017, Metlock Co. leased a building to Ivanhoe 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 $3,000,000 (unguaranteed). 2. The leased building has a cost of $3,500,000 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 $270,000 per year and are made at the beginning of the year. 5. Ivanhoe has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Ivanhoe. 6. Both the lessor and the lessee are on a calendar-year basis. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.,)Explanation / Answer
The lease is operating lease from the point of view of Lessor. Accordingly, the journal entries have been recorded.
In the books of Metlock
Date
Account tittles and explanations
Debit ($)
Credit ($)
01-01-17
Building
3500000
Bank
3500000
(Being the building acquired)
Bank
270000
Lease rental
270000
(Being lease rental received)
31-12-17
Lease rental
270000
Profit and loss account
270000
(Being the lease rental credited to profit and loss account)
Depreciation
70000
Building
70000
(Being depreciation charged)
Profit and loss account
70000
Depreciation
70000
(Being depreciation debited to profit and loss account)
Working:
Depreciation each year
Cost of building
3500000
Number of years
50
Depreciation per year on SLM
70000
Journal entries in the books of Ivanhoe:
In the books of Ivanhoe
Date
Account tittles and explanations
Debit ($)
Credit ($)
Leased building
1888716.7
Metlock
1888716.66
(Being the lease recorded)
Metlock
270000
Bank
270000
(Being lease payment made)
31-12-17
Interest on lease
145684.5
Metlock
145684.5
(Being interest on due recorded)
Profit and loss account
145684.5
Interest on lease
145684.5
(Being interest on lease debited to profit and loss account)
Year
Annual lease rental
PV factor @9% pa
Present value of annual lease
0
(270000 + 40000) = 310000
1
310000
1
270000
0.917431
247706.4
2
270000
0.84168
227253.6
3
270000
0.772183
208489.5
4
270000
0.708425
191274.8
5
270000
0.649931
175481.5
6
270000
0.596267
160992.2
7
270000
0.547034
147699.2
8
270000
0.501866
135503.9
9
270000
0.460428
124315.5
10
0.422411
0
Present value of lease
1928717
Initial measurement of the right of use asset:
Year
Annual lease rental
PV factor @9% pa
Present value of annual lease
0
310000
1
310000
1
270000
0.917431
247706.4
2
270000
0.84168
227253.6
3
270000
0.772183
208489.5
4
270000
0.708425
191274.8
5
270000
0.649931
175481.5
6
270000
0.596267
160992.2
7
270000
0.547034
147699.2
8
270000
0.501866
135503.9
9
270000
0.460428
124315.5
10
0.422411
0
Present value of lease
1928717
In the books of Metlock
Date
Account tittles and explanations
Debit ($)
Credit ($)
01-01-17
Building
3500000
Bank
3500000
(Being the building acquired)
Bank
270000
Lease rental
270000
(Being lease rental received)
31-12-17
Lease rental
270000
Profit and loss account
270000
(Being the lease rental credited to profit and loss account)
Depreciation
70000
Building
70000
(Being depreciation charged)
Profit and loss account
70000
Depreciation
70000
(Being depreciation debited to profit and loss account)
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