Question

Exercise 21A-17 a-c (Part Level Submission) On January 1, 2017, Sage Hill Co. leased a building to Oriole 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 $2,800,000 (unguaranteed). 2. The leased building has a cost of $3,300,000 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. * Lease payments are $270,000 per year and are made at the beginning of the year. 5. Oriole has an incremental borrowing rate of 6%, and the rate implicit in the lease is unknown to Oriole. 6. Both the lessor and the lessee are on a calendar-year basis.

Answer 1

Date	Accounts Title & Explanation	Dr	Cr
01/01/17	Building A/C Dr	$3,300,000
	to Cash or Bank A/C		$3,000,000
01/01/17	Lease Receivable Dr	$1987224
	to Building A/C		$1987224
	(We have to record lease receivable at net present value of all lease rental received, implicit rate provided 6%)
01/01/17	Cash or Bank A/C Dr	$253800
	to Lease receivable (270000 - 16200)		$253800
12/31/17	Cash & Bank A/C Dr	$16200
	to Finance Charge (270000 * 6%)		$16200
12/31/17	Deprecation A/C Dr	$66000
	to Building A/C ($ 3,300,000/50)		$66000