Question

Exercise 21A-17 a-c On January 1, 2017, Metlock Co. leased a building to Ivanhoe Inc. The relevant information related to the lease is as follows. 1. 2 3. The lease arrangement is for 10 years. The building is expected to have a residual value at the end of the lease of $3,600,000 (unguaranteed). The leased building has a cost of $4,100,000 and was purchased for cash on January 1, 2017 The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $265,000 per year and are made at the beginning of the year. Ivanhoe has an incremental borrowing rate of 5%, and the rate implicit in the lease is unknown to Ivanhoe, Both the lessor and the lessee are on a calendar-year basis. 4. 5. 6. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Prepare the journal entries that Metlock should make in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 1/1/17 (To record cost of the building) (To record receipt of lease payment) 12/31/17 (To record the recognition of the revenue each period) (To record depreciation expense on the leased asset)

Answer 1

Answer:

1.)
prepare journal entries that Metlock should make in the following manner:

Date	Particulars	Debit ($)	Credit ($)
1-Jan	Building: Leased to Ivanhoe	4,100,000
	Cash		4,100,000
	(To record the building purchased)
1-Jan	Cash	265,000
	Unearned Lease revenue		265,000
	(To record lease payment received)
31-Dec	Unearned Lease revenue	265,000
	Lease revenue		265,000
	(To record the revenue recognised for the period)
31-Dec	Depreciation expense	82,000
	Accumulated depreciation		82,000
	(To record the depreciation expense)

Working Notes:

Calculate the depreciation expense in the following manner:

Depreciation expense = Cost of Asset / Useful life
=4100000/50 years
=$82000

2.)

Date	Particulars	Debit ($)	Credit ($)
1-Jan	Right of use asset	2,148,572
	Lease Liability		2,148,572
	(To record lease)
1-Jan	Lease liability	265,000
	Cash		265,000
	(To record lease liability)
31-Dec	Lease expense	265,000
	Right of use asset		170,821
	Lease liability		94,179
	(To record the revenue recognized for the period)

Working Notes:

a) Calculate Right of use Asset for entry recorded on january 01 in the following manner:

Year	Lease per year	Annuity Present Value Factor @5%	Total
1	265000	1	265000
9	265000	7.10782	1883572
Right of use Asset	2,148,572

b) Calculate lease liability for the entry recorded on Decemebr 31 in the following manner:

year	Lease per year	Annuity Present Value Factor @ 5%	Total
9	265000	7.10782	1883572
Lease Liability (accrued interest) @ 5%	94,179

3)

Calculate the initial measurement of the right of use asset in the following manner:

Initial measurement of right of use asset = (Initial measurement of lease liability + lease payment - lease incentive received + initial direct costs)
=2148572+265000-265000+20000
=2,128,572