I need help answering this question please Exercise 21A17 ac

I need help answering this question please

Exercise 21A-17 a-c (Part Level Submission) On January 1, 2017, Larkspur Co. leased a building to Crane Inc. The relevant information related to thelease is as follows. 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) 1. 2. The leased building has a cost of $4,200,000 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 $275,000 per year and are made at the beginning of the year. Crane has an incremental borrowing rate of 5%, and the rate implicit in the lease is unknown to Crane. Both the lessor and the lessee are on a calendar-year basis. 6. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Prepare the journal entries that Larkspur 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 (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)

Solution

1. The above lease arrangement is an operating lease due to the following reason:

The lease arrangement period is for 10 years which is less than 75% of the economic life of leased building.

2. Journal entries:

1/1/17 Building Dr. 4200000

To Cash 4200000

(Being building purchased in cash)   

Cash A/c Dr. 275000

To Unearned Lease Rental Revenue 275000
(Being lease rental received)

12/31/17   Unearned Lease Rental Revenue Dr. 275000

To Lease Rental Revenue 275000

(Being lease rental revenue recognised)

Depreciation (4200000/50) Dr. 84000

To Building 84000

( Being depreciation expense charged on building)