Question

Brief Exercise 21-24

Marin, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $36,000 from United Corporation. The agreement stipulates the following.

●		Rental payments of $8,633 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease.
●		Marin must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year.
●		Marin must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse.
●		Marin paid legal fees of $3,000 in executing the lease.

Assuming Marin’s incremental borrowing rate is 10% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Marin. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Click here to view factor tables.

Account Titles and Explanation	Debit	Credit

Answer 1

Answer -

Journal entry to record the initial lease liability and right-of-use asset for Marin

Account Titles and Explanation	Debit ($)	Credit ($)
Right-of-Use Asset Cash [This is legal fee] Lease Liability [Refer working note - (1)]	41083 - -	- 3000 38083

# Working note - (1) - Calculation of Lease liability -

	Particulars	Explanation	Amount ($)
I.	Present value of rental payment	Rental payment * PVAF of $1(10%, 5) = $8633 * 4.169865	35998
II.	Present value of insurance payment	Insurance payment * PVAF of $1(10%, 5) = $500 * 4.169865	2085
Lease Liability		I + II	38083