On
January 1, 2011, Morrison Corp. leased a building to Wisen Inc. Both companies
use IFRS. The relevant information on the lease is as follows:
1.
The lease arrangement is for 10 years.
2.
The leased building cost $5.5 million and was purchased by Morrison for cash on
July 1, 2011.
3.
The building is amortized on a straight-line basis. Its estimated economic life
is 40 years.
4.
Lease payments are $325,000 per year and are made at the end of the lease year,
and so the first lease payment was made June 30, 2012.
5.
Property tax expense of $57,000 and insurance expense of $11,000 on the
building were incurred by Morrison for the 2011 fiscal year. Payment for these
two items was made on July 1, 2011.
6.
Both the lessor and the lessee have their fiscal years on a calendar-year
basis.
Instructions
(a)
Prepare the journal entries and any year-end adjusting journal entries made by
Morrison Corp. in 2011.
(b)
Prepare the journal entries and any year-end adjusting journal entries made by
Wisen Inc. in 2011.
(c)
If Morrison paid $30,000 to a real estate broker on July 1, 2011, as a fee for
finding the lessee, how much should Morrison Corp. report as an expense for
this fee item in 2011?
(d)
Would any of the accounting treatment you have provided in (a) through (c)
above change if Morrison had been using private enterprise GAAP?
(a) Entries for
Morrison Corp. are as follows:
1/7/11 Building
(Leased)............ 5,500,000
Cash .................... 5,500,000
Property
Tax Expense......... 57,000
Insurance
Expense............ 11,000
Cash .................... 68,000
12/31/11 Rent
Receivable.............. 162,500
Rental
Income........... 162,500
($325,000
X 6 / 12 = $162,500)
Depreciation
Expense......... 68,750
Accumulated
Depreciation
—Building.............. 68,750
[($5,500,000 ÷ 40) X 6 / 12 = $68,750]
(b) Entries for
Wisen Inc. are as follows:
12/31/11 Rent
Expense................. 162,500
Rent
Payable............ 162,500
(c) The real estate broker’s fee should be
amortized equally over the 10-year period. As a result, real estate fee expense
of $1,500 ($30,000 ÷ 10 X 6 ÷ 12) should be reported as an expense in 2011 and
$3,000 per year for each of the next nine years until the last year of the
lease when the expense will be $1,500.
(d) None of the accounting treatment above would
change if Morrison were to use private enterprise GAAP.
