Purchase Solution

# Accounting for an Operating Lease

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On Jan. 1, 2008, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

1.The lease arrangement is for 10 years.
2.The leased building cost \$4,500,000 and was purchased for cash on Jan. 1, 2008.
3.The building is depreciated on a straight-line basis. Its estimated economic life is 50 years.
4.Lease payments are \$275,000 per year and are made at the end of the year.
5.Property tax expense of \$85,000 and insurance epense of \$10,000 on the building were incurred by Nelson in the first year. Payment on these two items were made at the end of the year.
6.Both the lessor and the lessee are on a calendar-year basis.

Insturction:
a. Prepare the journal entries that Nelson Co. should make in 2008.
b. Prepare the journal entries that Wise Inc. should make in 2008.

##### Solution Summary

On Jan. 1, 2008, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

1.The lease arrangement is for 10 years.
2.The leased building cost \$4,500,000 and was purchased for cash on Jan. 1, 2008.
3.The building is depreciated on a straight-line basis. Its estimated economic life is 50 years.
4.Lease payments are \$275,000 per year and are made at the end of the year.
5.Property tax expense of \$85,000 and insurance expense of \$10,000 on the building were incurred by Nelson in the first year. Payment on these two items were made at the end of the year.
6.Both the lessor and the lessee are on a calendar-year basis.

Instruction:
a. Prepare the journal entries that Nelson Co. should make in 2008.
b. Prepare the journal entries that Wise Inc. should make in 2008.

##### Solution Preview

a. Prepare the journal entries that Nelson Co. should make in 2008.

Jan. 1 Building on Lease \$4,500,000
Cash \$4,500,000
To record the purchase of a building for lease.

Dec. 31 Cash ...

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