(Accounting for an Operating Lease)

On January 1, 2017, Nelson Co. leased a building to Wise 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 $3,500,000

(unguaranteed).

2.

The leased building has a cost of $4,000,000 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.

Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise.

6.

Both the lessor and the lessee are on a calendar-year basis.

Instructions

(a)

Prepare the journal entries that Nelson should make in 2017.

(b)

Prepare the journal entries that Wise should make in 2017.

(c)

If Wise paid $30,000 to a real estate broker on January 1, 2017, as a fee for finding the lessor, how much should Wise

report as an expense for this item in 2017