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Prepare lessor journal entry to record the inception

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Reference no: EM132995908

Lessee Company is planning to lease a building from Lessor Company. The terms are as follows:

  • Lease term = 20 years
  • Semi-annual lease payments = $1,070,000 (beginning with the inception of the lease).
  • Purchase option: at the end of the lease, Lessee can purchase the building for $1,000,000 (the building is expected to have a value of at least $5,000,000 at that time. Lessor has no interest in retaining ownership of the building after the lease term.
  • The interest rate implicit in the lease is 6% (annual). Lessee's incremental borrowing rate is approximately the same.
  • Similar buildings are selling in the range of $24 million to $26 million, the value of the building is therefore assumed to be equal to the present value of the lease payments.
  • Lessor constructed the building at a total cost of $18,000,000.

Problem 1. Calculate the lease liability and the lease receivable (they should be the same). Show the variables and values you used to calculate the amount.

Problem 2. Prepare Lessee's journal entry to record the inception of the lease

Problem 3. Prepare Lessor's journal entry to record the inception of the lease. Assume the building is in an account "Construction held for lease."

Problem 4. Prepare Lessee's journal entry to record the second payment (not the first one). If not obvious, show how you calculated any of the amounts in the entry.

Reference no: EM132995908

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