Question

On January 1, 2020, Windsor Co. leased a building to Wildhorse Inc. The relevant information related to the lease is as follows.

1.		The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,400,000 (unguaranteed).
2.		The leased building has a cost of $3,900,000 and was purchased for cash on January 1, 2020.
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 $285,000 per year and are made at the beginning of the year.
5.		Wildhorse has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Wildhorse.
6.		Both the lessor and the lessee are on a calendar-year basis.

Click here to view factor tables.
(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Prepare the journal entries that Windsor should make in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20
	(To record cost of the building)
1/1/2012/31/20
	(To record receipt of lease payment)
1/1/2012/31/20
	(To record the recognition of the revenue each period)
1/1/2012/31/20
	(To record depreciation expense on the leased asset)

eTextbook and Media

List of Accounts

  

  

Prepare the journal entries that Wildhorse should make in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/20
	(To record the lease)
1/1/2012/31/20
	(To record lease payment)
1/1/2012/31/20

eTextbook and Media

List of Accounts

  

  

If Wildhorse paid $40,000 to a real estate broker on January 1, 2020, as a fee for finding the lessor, what is the initial measurement of the right-of-use asset?

Right-of-use asset

$

Answer 1

The real estate broker fee must be capitalized and amortized equally over the 10-year period. Hence that real estate fee expense of $4000(40,000$÷10) must be reported in each period.