E21-12 (Accounting for an Operating Lease) On January 1, 2014, Doug Nelson Co. l
ID: 2566347 • Letter: E
Question
E21-12 (Accounting for an Operating Lease) On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. 2. The leased building cost $4,500,000 and was purchased for cash on January 1, 2014. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $275,000 per year and are made at the end of the year. 5. Property tax expense of $85,000 and insurance expense of $10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year. 6. Both the lessor and the lessee are on a calendar-year basis Instructions (a) Prepare the journal entries that Nelson Co. should make in 2014. (b) Prepare the journal entries that Wise Inc. should make in 2014. (c) If Nelson paid $30,000 to a real estate broker on January 1, 2014, as a fee for finding the lessee, hovw much should be reported as an expense for this item in 2014 by Nelson Co.?Explanation / Answer
a. In the books of Doug Nelson Co. :
b. In the books of Patrick Wise Inc. :
c. The amount of $ 30,000 paid to a real estate broker for finding the lessee should be capitalized, and carried in the balance sheet as real estate brokerage. As the lease arrangement is for 10 years, each year beginning 2014, $ 3,000 ( $ 30,000 / 10), should be reported as real estate brokerage expense in the books of Doug Nelson Co., with a corresponding credit to real estate brokerage.
Date Account Titles Debit Credit $ $ January 1, 2014 Building 4,500,000 Cash 4,500,000 December 31, 2014 Cash 275,000 Rent Revenue 275,000 December 31, 2014 Depreciation Expense ( $ 4,500,000 / 50) 90,000 Accumulated Depreciation : Buildings 90,000 December 31, 2014 Property Tax Expense 85,000 Insurance Expense 10,000 Cash 95,000Related Questions
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