In 2014, Grishell Shipping Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2015, Grishell Shipping Company took possession of the lease properties. On January 1, 2015 and 2016, the company made cash payments of £948,000 that were recorded as rental expenses.

Although the terminals have a composite useful life of 40 years, the non-cancelable lease runs for 20 years from January 1, 2015, with a bargain-purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2015, through December 31, 2034. Advance rental payments of £800,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term.

Advance rental payments of £320,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for £1 on December 31, 2034. It also must make annual payments to the lessor of £125,000 for property taxes and £23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.

Instructions (Round all numbers to the nearest pound.)

(a) Prepare a schedule to compute for Grishell Shipping Company the discounted present value of the terminal facilities and related obligation at January 1, 2015.

(b) Assuming that the discounted present value of terminal facilities and related obligation at January 1, 2015, was £7,600,000, prepare journal entries for Grishell Shipping Company to record the:
(1) Cash payment to the lessor on January 1, 2017.
(2) Amortization of the cost of the leased properties for 2017 using the straight-line method and assuming a zero residual value.
(3) Accrual of interest expense at December 31, 2017.
Selected present value factors are as follows.

Transcribed Image Text:

Periods For an Ordinary Annulty of 1 at 6% .943396 For 1 at 6% .943396 2 1.833393 .889996 8 6.209794 .627412 9 6.801692 .591898 10 7.360087 .558395 19 11.158117 .330513 20 11.469921 .311805