On January 1, 2016, Holbrook Company leased a building under a three-year operat

Question

On January 1, 2016, Holbrook Company leased a building under a three-year operating lease. The annual rental payments are $75,000 on January 1, 2016, the inception of the lease, and $57,000 January 1 of 2017 and 2018. Holbrook made structural modifications to the building costing $92,100 before occupying the building. The useful life of the building and the modifications is 30 years with no expected residual value. Required: Prepare the appropriate journal entries for Holbrook Company for 2016. Holbrook's fiscal year is the calendar year, and the company uses straight-line depreciation.

1/1/16 Record the entry to cash paid for prepaid rent.

Record the entry to cash paid for prepaid rent.

Record the entry to cash paid for leasehold improvements.

12/31/16

.

12/31/16

Record the entry for rent expense.

Record the entry for depreciation expense.

Explanation / Answer

Operating lease is an agreement between Holbrook Company (Lessee) to rent an asset from a Lessor. The lessor owns the asset and Holbrook rents the asset in return of periodic rental payment. Holbrook never owns the assets and at the end of 3 year term it is returned to the Lessor. Hence question recording depreciation in the books of Holbrook doesn't arise. It will record only the rental payments and any improvement to asset as a operating expenses In the books of Holbrook Company (Lessee) Journal Entries Date Particulars Debit Credit 01/01/2016 Prepaid Rent 75000 Cash 75000 (Rent paid in advance to Lessor ) 01/01/2016 Repairs & maintenance 92100 Cash 92100 (Improvement to building paid) 31/01/2016 Rent 75000 Prepaid Rent 75000 (Rent expense booked at the end of first year of Operating Lease) 31/01/2016 No entry for depreciation as asset was owned by lessor under Operating Lease

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