n January 1, 2017, Nelson Co. leased a building to Wise Inc. The relevant inform

Question

n January 1, 2017, Nelson Co. leased a building to Wise 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 $3,500,000 (unguaranteed).

2.The leased building has a cost of $4,000,000 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 $275,000 per year and are made at the beginning of the year.

5.Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise.

6.Both the lessor and the lessee are on a calendar-year basis.

Instructions

(a)  

Prepare the journal entries that Nelson should make in 2017.

(b)  

Prepare the journal entries that Wise should make in 2017.

(c)  

If Wise paid $30,000 to a real estate broker on January 1, 2017, as a fee for finding the lessor, how much should Wise report as an expense for this item in 2017?

Explanation / Answer

Journal Entry in the Books of Nelso Co. Date Particular Debit Credit 01/01/2017 Building $4,000,000 Cash $4,000,000 To Record Purchase of Building 01/01/2017 Cash $275,000 Unearned Lease Revenue $275,000 To Record Receipt of Lease Payment 31/12/2017 Unearned Lease Rent $275,000 Lease Revenue $275,000 To Record Recognition of the Revenue 31/12/2017 Depreciation Expense ($4000,000/50) $80,000 Accumulated Depreciation-Building $80,000 To Record Depreciation Journal Entry in the Books of Wise Inc. Date Particular Debit Credit 01/01/2017 Right of Use Asset ($275000*10)*PVFIA @8%, 10 $1,845,250 Lease Liability $1,845,250 To Record Lease 01/01/2017 Lease Liability $275,000 Cash $275,000 To record Lease Liability 31/12/2017 Lease Expense $275,000 Right of Use Asset $149,380 Lease liability ($1845250-275000)*8% $125,620 To Record Lease expense and reduction of Lease Laibility c) The Real Estate Broker Fees will be amortised Equally over the period of 10 Year. Hence Real Estate Fee Expense will be ($30000/10)=$3000    reported in Each period

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