On January 1, 2020, Nelson Co. leased a building to Wise 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 $3,500,000 (unguaranteed). 2. The leased building has a cost of $4,000,000 and was purchased for cash on January 1, 2020. 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. 5. Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise. 6. Both the lessor and the lessee are on a calendar-year basis. Instructions a.    Prepare the journal entries that Nelson should make in 2020. b.    Prepare the journal entries that Wise should make in 2020. c.    If Wise paid $30,000 to a real estate broker on January 1, 2020, as a fee for finding the lessor, what is the initial measurement of the right-of-use asset? Explain.

Question

On January 1, 2020, Nelson Co. leased a building to Wise 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 $3,500,000 (unguaranteed).
  • 2. The leased building has a cost of $4,000,000 and was purchased for cash on January 1, 2020.
  • 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.
  • 5. Wise has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Wise.
  • 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

a.    Prepare the journal entries that Nelson should make in 2020.

b.    Prepare the journal entries that Wise should make in 2020.

c.    If Wise paid $30,000 to a real estate broker on January 1, 2020, as a fee for finding the lessor, what is the initial measurement of the right-of-use asset? Explain.

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