Question

On January 1, 2020, Teal Mountain Co. leased a building to Sandhill Inc. The relevant information related to the lease is as follows. Prepare the journal entries that Teal Mountain should make in 2020. Prepare the journal entries that Sandhill should make in 2020. If Sandhill paid $40,000 to a real estate broker on January 1, 2020, as a fee for finding the lessor, what is the initial measurement of the right-of-use asset?

1.		The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,700,000 (unguaranteed).
2.		The leased building has a cost of $4,200,000 and was purchased for cash on January 1, 2020.
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.		Sandhill has an incremental borrowing rate of 6%, and the rate implicit in the lease is unknown to Sandhill.
6.		Both the lessor and the lessee are on a calendar-year basis.

Answer 1

Part A

Date	Account titles and explanation	Debit	Credit
1/1/20	Buildings	470000
	Cash		470000
12/31/20	Cash	275000
	Rent revenue		275000
	Depreciation Expense	94000
	Accumulated Depreciation—Buildings (470000/50)		94000

Part B

Date	Account titles and explanation	Debit	Credit
12/31/20	Rent expense	275000
	Cash		275000

Part C

Initial measurement of the right-of-use asset = 2145465+4000 = $2149465

Present value = 275000*present value of annuity due of $1 @ n= 10, i=6% = 275000*7.80169 = $2145465

40000/10 = 4000