On July 1, 2012, Falk Company signed a contract to lease space in a building for

Question

On July 1, 2012, Falk Company signed a contract to lease space in a building for 20 years. The lease contract calls for annual (prepaid) rental payments of $80,000 on each July 1 throughout the life of the lease and for the lessee to pay for all additions and improvements to the leased property. On June 25, 2017, Falk decides to sublease the space to Ryan & Associates for the remaining 15 years of the lease—Ryan pays $225,000 to Falk for the right to sublease and it agrees to assume the obligation to pay the $80,000 annual rent to the building owner beginning July 1, 2017. After taking possession of the leased space, Ryan pays for improving the office portion of the leased space at a $1,680,000 cost. The improvements are paid for by Ryan on July 5, 2017, and are estimated to have a useful life equal to the 15 years remaining in the life of the building.

Required: 1. Prepare entries for Ryan to record (a) its payment to Falk for the right to sublease the building space, (b) its payment of the 2017 annual rent to the building owner, and (c) its payment for the office improvements.

1. Record the sublease for $225,000 cash.

2. Record the annual lease rental of $80,000 cash.

3. Record the costs of leasehold improvements of $1,680,000 cash.

Explanation / Answer

Journal entries: Sl No. Account titles and explanation Debit Credit 1 Leasehold 225000 Cash 225000 (Record the sublease for $225,000 cash) 2 Prepaid rent 80000 Cash 80000 (Record the annual lease rental of $80,000 cash) 3 Leasehold improvements 1680000 Cash 1680000 (Record the costs of leasehold improvements of $1,680,000 cash)

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