Rancour
Ltd., which uses private enterprise GAAP, recently expanded its operations into
an adjoining municipality and, on March 30, 2011, signed a 15-year lease with
its Municipal Industrial Commission (MIC). The property has a total fair value
of $150,000 on March 30, 2011, with one third of the amount attributable to the
land and two thirds to the building. The land is expected to double in value
over the next 15 years, while the building will depreciate by 60%. The lease
includes a purchase option at the end of the lease that allows Rancour to
receive title to the property for a payment of $90,000.
Rancour
is required to make rental payments of $10,000 annually, with the first payment
due March 30, 2011. The MIC’s implicit interest rate, known to all, is 7%. The
building’s economic life is estimated at 20 years, at which time it will have a
small residual value of $10,000.
Instructions
(a)
Prepare the entries required by Rancour on the signing of the lease and the
payment of the first lease payment.
(b)
Assuming that Rancour’s year end is December 31, prepare the entries that are
required on December 31, 2011; March 30, 2012; and December 31, 2012. Rancour
does not use reversing entries.
(a)
March 30, 2011
Land under Capital Leases *.............. 43,358
Leased Building.......................... 86,717
Lease
Obligation**................... 130,075
* (1/3 X $130,075** = $43,358)
Lease Obligation......................... 10,000
Cash................................. 10,000
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Excel formula =PV(rate,nper,pmt,fv,type)
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**Using a financial
calculator:
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PV
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$ ?
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Yields $ (130,075)
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I
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7%
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N
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15
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PMT
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$ (10,000)
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FV
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$ (90,000)
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Type
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1
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(b)
December 31, 2011:
Interest Expense........................ 6,304
Interest
Payable.................... 6,304
[($130,075 – $10,000) X 7% X 9/12 = $6,304]
Depreciation Expense - Building......... 3,252
Accumulated
Depreciation – Building. 3,252
($86,717 / 20 year X 9/12 = $3,252)
March 31, 2012
Interest Expense *...................... 2,101
Interest Payable........................ 6,304
Lease Obligation........................ 1,595
Cash................................ 10,000
* [($130,075 – $10,000) X 7% X 3/12]
December 31, 2012:
Interest Expense........................ 6,220
Interest
Payable.................... 6,220
[($130,075 – $10,000 - $1,595) X 7% X 9/12 = $6,220]
Depreciation Expense - Building......... 4,336
Accumulated
Depreciation – Building. 4,336
($86,717 / 20 year = $4,336)
