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Q.21-12E-a

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Intermediate Accounting (Kieso)
Found in: Page 1243

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Short Answer

(Accounting for an Operating Lease) On January 1, 2017, 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, 2017.
  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. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

  1. Prepare the journal entries that Nelson Co. should make in 2017.

The total debit and credit side of the journal is $4,960,000.

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Step by Step Solution

Meaning of Operating Lease

An operating lease is a contract that grants the right to utilize assets but not the right to own them. Leased assets and liabilities associated with leased assets are not recorded in the company's balance sheet; hence, operational leases are considered off-balance-sheet financing.

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Jan. 1, 2017

Buildings

4,500,000

Cash

4,500,000

Dec. 31, 2017

Cash

275,000

Rent Revenue

275,000

Dec. 31, 2017

Depreciation Expense

90,000

Accumulated Depreciation

Buildings

90,000

Dec. 31, 2017

Property Tax Expense

85,000

Insurance Expense

10,000

Cash

95,000

Working Notes:

Calculation of accumulated depreciation

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