Question

Q3. At the beginning of 2020, MPK lease restaurant space from Wilson Corporation under a 10-year lease agreement. The contract calls for annual lease payments of $25,000 each at the end of each year. The building was acquired by the Wilson, the lessor, at a cost of $300,000 and is expected to have a useful life of 25 years with no residual value for calculating straight-line depreciation. Wilson seeks a 10% return on its lease investments.

Required:

1. Classify the lease for the lessee, MPK.
2. What will be the effect of the lease on MPK's earnings for the first year, and on the balance sheet at the end of the year (ignore taxes)?
3. Prepare the journal entries for MPK in 2020 and 2021. Round your answers to the nearest whole dollar amounts.
4. Prepare the journal entries for Wilson Corporation in 2020 and 2021. Round your answers to the nearest whole dollar amounts.

Answer 1

Answerſ -given that, of the Now here, from • Here, It will be treated og operating Lease for the lessee since the Net present value (NVP) of lease payment is less than 90 peocent assets fair value and also the period for the lease agreement is less than 75% of the asset life the lease will be treated as operating Lease for the lessee & it will be treated as rent expense in the books of lessee accounts. W And here MPK's earning for the first year will be deducted by de ducted by $25,000 as $25,000 as this amount of lease payment will be treated gf gent expense f it will appeal the debit side of the balance sheet under the sent expense head. It MPK make the econing of $75,000 at the end of the year than the total earning og MPK after making the lease payment will be $ 50,000 because this $ 25,000 will be tooted as rent expense f shall be deducted from the toral eaning of MPK. on Then . here, Jouonal Entry of MPK of the end of 2020. Rent expense A/c Do. $2.5,000 TO bank Alc $25.000 Journal Entry of MPK at the end of 2021. Rent expense Ale Do. $25000 70 bank ALC :$ 25,000

UN (1) Journal entry of wilson at the end of 2020. Bank Alc Dr, $25,000. To Rent Received Alc $ 25,000 Depreciation on Building Alc Dr.$12,000. To Building Alc $12,000. Journal Entry of wilson at the end of 2021. Bank Alo Do. $ 25,000. To Rent Received Ale $25,000. Depoéciation on Building Alc Do. $ 12,000 , TO Building als $19.000 Bank A/c Do. $2,500. To interest Received A/c $2,500 b. O