Kieso E21-12 (Accounting for an Operating Lease)

E21-12 (Accounting for an Operating Lease) On January 1, 2012, Secada Co. leased a building to Ryker Inc. The relevant information related to the lease is as follows.

1.The lease arrangement is for 10 years.

2.The leased building cost $3,600,000 and was purchased for cash on January 1, 2012.

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 $220,000 per year and are made at the end of the year.

5.Property tax expense of $85,000 and insurance expense of $10,000 on the building were incurred by Secada in the first year.

Payment on these two items was made at the end of the year.

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

Instructions

(a)Prepare the journal entries that Secada Co. should make in 2012.

(b)Prepare the journal entries that Ryker Inc. should make in 2012.

(c)If Secada paid $30,000 to a real estate broker on January 1, 2012, as a fee for finding the lessee,

how much should be reported as an expense for this item in 2012 by Secada Co.?

Jan.1,2012

a) Buildings 3,600,000

Cash 3,600,000

Dec.31, 2012

Cash 220,000

Rent Revenue 220,000

Depreciation expense 72,000

Accumulated Depreciation 72,000

(3,600,000/50=72,000)

Property tax expense 85,000

Insurance expense 10,000

Cash 95,000

b) Rent expense 220,000

Cash 220,000

c) The real estate broker's fee of $30,000 should be capitalized and amortized over the period of 10 years.

Therefore, (30000/10=3000) $3000 should be reported each period.