Question

On January 1, 2017, Sarasota Co. leased a building to Ivanhoe Inc. The relevant information related to the lease is as follows.

1.		The lease arrangement is for 10 years.
2.		The leased building cost $4,320,000 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 $257,900 per year and are made at the end of the year.
5.		Property tax expense of $79,100 and insurance expense of $9,700 on the building were incurred by Sarasota 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.

(a) Prepare the journal entries that Sarasota Co. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
1/1/1712/31/17
1/1/1712/31/17
	(To record receipt of lease payment.)
	(To record depreciation.)
	(To record insurance and property tax.)

(b) Prepare the journal entries that Ivanhoe Inc. should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
12/31/17

(c) If Sarasota paid $28,500 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Sarasota Co. report as an expense for this item in 2017?

Expense should be reported

$

Answer 1

a) Account Titles and Explanation Debit Credit Date 1/1/17 Buildings $4,320,000 Cash $4,320,000 Cash 12/31/17 $257,900 $257,900 Rent Revenue (Torecord receipt of lease payment.) $86,400 Depreciation Expense Accumulated Depreciation-Building $86,400 (Torecord depreciation.) [$4,320,000 /50 years] Property Tax Expense $79,100 Insurance Expense $9,700 Cash $88,800 (To record insurance and property tax.) b) Date Account Titles and Explanation Debit Credit 12/31/17 Rent Expense $257,900 Cash $257,900

c) The real estate broker's fee should be capitalized and amortized equally over the 10-year period As a result, real estate fee expense of $2,850($28,500 10) should be reported in each period.