Lem Company leased the first three floors in a building under an operating lease

Question

Lem Company leased the first three floors in a building under an operating lease contract for a 10-year period beginning January 1, 2011. The company paid $240,000 in cash (not representing a specific period’s rent) and agreed to make annual payments equal to 1% of the first $1,500,000 of sales and 0.5% of all sales over $1,500,000. Sales for 2011 amounted to $4,500,000. Payment of the annual amount will be made in January 2012.

Prepare journal entries to record the cash payment of January 1, 2011, and the proper expense to be recognized for the use of the space in the leased building for 2011.

Explanation / Answer

SOLUTION

Date Accounts titles and Explanation Debit ($) Credit ($) 01-01-2011 Lease expense 240,000 Cash 240,000 (To record cash payment) 31-12-2011 Lease expense 30,000 Lessor    30,000 (To record proper expense for use of space) {(1,500,000*1%)+ [(4,500,000-1,500,000)*0.5%]} 01.01.2012 Lessor 30,000 Cash 30,000 (To record cash payment)

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