Question
On January 1, 2017, Kingbird Co. leased a building to Blossom Corp. The relevant information related to the lease is as follows.
1. The lease arrangement is for 5 years. The building is expected to have a residual value at the end of the lease of $2,280,000 (unguaranteed). 2. The leased building has a cost of $2,400,000 and was purchased for cash on January 1, 2017. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 30 years with no salvage value. 4. Lease payments are $300,000 per year and are made at the beginning of the year. 5. Blossom has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Blossom. 6. Both Kingbird and Blossom are on a calendar-year basis. Prepare the journal entries that Kingbird Co. should make in 2017. (Credit account titles are automatically indented Date Account Titles and Explanation Debit Credit To record cost of the building) To record receipt of lease payment) 12/31/17 To record the recognition of the revenue each period) To record depreciation expense on the leased asset) Prepare the journal entries that Blossom Corp. should make in 2017. (Credit account titles are automatically indente Date Account Titles and Explanation Debit Credit To record the lease) To record lease liability) 12/31/17 If Blossom paid $25,000 to a real estate broker on January 1, 2017, as a fee for finding the lessor, how much of that amou Expense should be reported
Explanation / Answer
Journal Entry in the Books of Kingbird Co. Date Account Title & Explanation Debit Credit 01-01-2017 Building 2400000 Cash 2400000 To record building purchased 12/31/17 Cash 3000000 Rent revenue 3000000 To record receipt of lease payment Depreciation Expense (2400000/30) 80000 Accumulated Depreciation 80000 To Record Depreciation Expense For Blossom Corp Date Accoutn Tittle & Expllanation Debit Creidr 12/31/17 Rent Expense 300000 Cash 300000 To Record Rent Expense Expense to be reported 25000/5 = 1250 The amount paid to broker needs to capitalized and amortized over lease period