On January 1, 2017, Marin Co. leased a building to Cullumber Inc. The relevant i
ID: 2516885 • Letter: O
Question
On January 1, 2017, Marin Co. leased a building to Cullumber 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 $2,700,000 (unguaranteed) 2. The leased building has a cost of $3,200,000 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 beginning of the year. 5. Cullumber has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Cullumber. 6. Both the lessor and the lessee are on a calendar-year basis.Explanation / Answer
Lease Liability = PV of Annual Rental =275000*PFV of 9% for 0-3 years =275000*3.531295 =971106 DR CR 01/01/2017 Right-of-use asset 971106 Lease liability 971106 01/01/2017 Lease liability 275000 Cash 275000 31/12/2017 End of year one entry DR CR Rent expense 275000 Lease liability (accrete interest) 62649.54 (971106-275000)*.09 Right-of-use asset 212350.5