On September 15, 2017, Cullumber Camping Limited, the lessee, entered into a 20-
ID: 2546497 • Letter: O
Question
On September 15, 2017, Cullumber Camping Limited, the lessee, entered into a 20-year lease with Sullivan Corp. to rent a parcel of land at a rate of $30,480 per year. Both Cullumber and Sullivan use ASPE. The annual rental is due in advance each September 15, beginning in 2017. The land has a current fair value of $196,000. The land reverts to Sullivan at the end of the lease. Cullumber Camping’s incremental borrowing rate and Sullivan’s implicit interest rate are both 12%.
Date
Account Titles and Explanation
Debit
Credit
SHOW LIST OF ACCOUNTS
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Date
Account Titles and Explanation
Debit
Credit
SHOW LIST OF ACCOUNTS
On September 15, 2017, Cullumber Camping Limited, the lessee, entered into a 20-year lease with Sullivan Corp. to rent a parcel of land at a rate of $30,480 per year. Both Cullumber and Sullivan use ASPE. The annual rental is due in advance each September 15, beginning in 2017. The land has a current fair value of $196,000. The land reverts to Sullivan at the end of the lease. Cullumber Camping’s incremental borrowing rate and Sullivan’s implicit interest rate are both 12%.
Explanation / Answer
As per ASPE Leasehold interests in land are normally classified as operating leases unless there is reasonable assurance that ownership will pass to the lessee by the end of the lease term.
In our case it is clearly mentioned that at the end of lease term of 20 years, land will be retreated to lessor i.e.Sullivan Corp. Thus the nature of lease is operating lease.
Journal entries in books of Cullumber Camping (Lessee) on September 15, 2017 and at December 31, 2017
Journal entries in books of Suvillian Corp. (Lessor) on September 15, 2017 and at December 31, 2017
15-09-2017 Lease Expense Dr 30,480 Lessor / Cash A/c Cr 30,480 31-12-2017 Lease Expense Dr 30,480 Lessor / Cash A/c Cr 30,480Related Questions
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