Question

On January 1, 2017, Marin Co. leased a building to Headland Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. 2. The leased building cost $4,165,000 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 $275,500 per year and are made at the end of the year. 5. Property tax expense of $76,900 and insurance expense of $9,000 on the building were incurred by Marin 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 Marin 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 0 for the amounts.) Date Account Titles and Explanation Debit Credit (To record receipt of lease payment.) (To record depreciation.) (To record insurance and property tax.) (b) Prepare the journal entries that Headland Inc. 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 0 for the amounts.) Date Account Titles and Explanation Debit Credit 12/31/17 (c) If Marin paid $28,000 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Marin Co. report as an expense for this item in 2017? Expense should be reported $

Answer 1

Part A

Entries for Marin Co. are as follows :

Date	account titles and explanation	debit	credit
January 1 2017	building	4165000
	Cash		4165000
December 31 2017	cash	275500
	Rental revenue		275500
December 31 2017	depreciation expense	83300
	Accumulated depreciation - building (4165000/50)		83300
December 31 2017	property tax expense	76900
	Insurance expense	9000
	Cash		85900

Part B

Entries for Headland Inc. are as follows :

Date	account titles and explanation	debit	credit
December 31 2017	rent expense	275500
	Cash		275500

Part C

The real estate broker’s fee should be capitalized and amortized equally over the 10-year period. As a result, real estate fee expense of $2,800 ($28,000 ÷ 10) should be reported in each period.