Exercise 2112 On January 1 2017 Stellar Co leased a building

Exercise 21-12 On January 1, 2017, Stellar Co. leased a building to Pearl Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. 2. The leased building cost $4,390,000 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 $262,800 per year and are made at the end of the year. 5. Property tax expense of $80,200 and insurance expense of $10,000 on the building were incurred by Stellar 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 Stellar 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 O for the amounts.) Date Account Titles and Explanation Debit Credit (To record receipt of lease payment.) (To record depreciation.)

Solution

answer Journal Entries in the books of Stellar Co. Date particular Dr Amount Cr. Amount 01-Jan-17 Building A/c Dr. $4,390,000           To Cash A/c $4,390,000 (Being Building purchased at cost of $4,390,000) 31-Dec-17 Cash A/c Dr $262,800           To Lease Rental Income A/c $262,800 (Being Lease Rental Income received at end of the year 31-Dec-17 Depreciation A/c Dr. $87,800           To Building A/c $87,800 (Depreciation Charged at end of the year) 31-Dec-17 Property tax expense A/c Dr. $80,200 Insurance Expenses A/c Dr $10,000           To Cash A/c $90,200 (Being Property tax expenses and Insurance expenses paid at end of year Note. Calculation of Depreciation Expenses = Cost/Economic Life $4,390,000/50 Years=$87,800 (B) Journal Entries in the books of Pearl Inc. 31-Dec-17 Operating Lease Expenses A/c Dr $262,800           To Cash A/c $262,800 (Being operating Lease expenses recorded at end of the year (c) Stellar should record brocker expense for the year ended 2017 $3,280 since Broker expenses of $32,800 is for entire 10 year operating Lease and it should be spreaded over its life. (i.e. $32,800/10 years=$3,280) Note :- This one is operating lease not financial lease because i. Lease term is less than its economic life ii. Ownership is not trasfered to lessee