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On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company.
On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: 1. The agreement requires rental payments of $100,000 at the beginning of each year. 2. The cost and fair value of the building on January 1, 2019, is $2 million. The storage building has not been specialized for Caswell. 3. The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight- line method. 4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor. 5. Caswell's incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate. 6. Executory costs of $7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year. Required: 1. Determine what type of lease this is for the lessee. 2. Prepare appropriate journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020. CHART OF ACCOUNTS Caswell Company General Ledger ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 190 Right-of-Use Asset LIABILITIES 211 Accounts Payable 231 Salaries Payable 253 Lease Liability 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 513 Rent Expense 514 Lease Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Tax Expense 2. Prepare appropriate journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease on December 31 for the years 2019 and 2020. General Journal Instructions How does grading work? GENERAL JOURNAL PAGE 2019 Score: 105/113 DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 Jan. 1 Right-of-Use Asset 560,654.00 2 Lease Liability 560,654.00 3 Jan. 1 Lease Liability 100,000.00 4 Cash 100,000.00 5 Dec. 31 Lease Expense 100,000.00 Lease Liability 26,295.00 7 Right-of-Use Asset 73,705.00 Dec. 31 Tax Expense 7,000.00 9 Cash 7,000.00 Record the payments and expenses related to this lease on December 31 for 2020. How does grading work? 1 2 DATE Jan. 1 Lease Liability Cash 3 Dec. 31 Lease Expense 5 6 7 Lease Liability Right-of-Use Asset Dec. 31 Tax Expense Cash GENERAL JOURNAL ACCOUNT TITLE PAGE 2020 Score: 84/88 POST. REF. DEBIT CREDIT 100,000.00 100,000.00 100,000.00 30,503.00 69,497,00 7,000.00 7,000.00
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