On January 1, 2017, Nelson Co. leased a building to Wise Inc. The relevant infor

Question

On January 1, 2017, Nelson Co. leased a building to Wise Inc. The relevant information related to the lease is as follows:

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.

The leased building has a cost of $4,000,000 and was purchased for cash on January 1, 2017.

The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.

Lease payments are $275,000 per year and are made at the beginning of the year.

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

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

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

a. Jornal Entry in the books of Nelson Date Account titles and explanation Debit Credit 01-Jan Building $400,000.00 Cash $400,000.00 To Record purchase of Building 31-Dec Cash $275,000.00 Rent Revenue $275,000.00 To Record Lease Rent 31-Dec Depreciation Expense $80,000.00 Accumulated Depreciation - Building $80,000.00 To Record Depreciation b. Journal Entry in the bookes of Wise 31-Dec Rent Expense $275,000.00 Cash $275,000.00 To record Lease rent expense c) $30000 Paid to Real Estate Broker will be capitalized and amortized equally over the 10 year period.

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