On January 1,2011,Travic Company entered a lease to rent office space.The lease requires Travic to pay $390,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.Travic's incremental borrowing rate is 10%.
Requirement:
Classify this lease for Travic Company and record the journal entries for the first year of the lease.

Question

Quizplus · Accepted Answer

The Answer is This is an operating lease because it does not transfer substantially all risks and rewards of ownership.Evaluation of the specific indicators is as follows: $This is an operating lease because it does not transfer substantially all risks and rewards of ownership.Evaluation of the specific indicators is as follows: Journal entries for first year of lease: \begin{array}{cccc} ext{Dec. 31,2011} & ext{Dr. Rent expense}&390,000\\ & ext{Cr. Prepaid rent}&&390,000 \end{array}$ Journal entries for first year of lease:

\begin{array}{cccc} ext{Dec. 31,2011} & ext{Dr. Rent expense}&390,000\\& ext{Cr. Prepaid rent}&&390,000\end{array}

On January 1,2011,Travic Company Entered a Lease to Rent Office