Question

On January 1, 2017, Marin Co. leased a building to Cullumber 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 $2,700,000 (unguaranteed).
2. The leased building has a cost of $3,200,000 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.
5. Cullumber has an incremental borrowing rate of 9%, and the rate implicit in the lease is unknown to Cullumber.
6. Both the lessor and the lessee are on a calendar-year basis.

Prepare the journal entries that Cullumber should make in 2017.

Answer 1