Problem - Advanced Accounting and Reporting-please with explanations
On January 1, 2008, J & J, signed a 10-year noncancelable lease agreement to lease a storage building from Action Co., (a wholly owned subsidiary of J & J)'. Collectability of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
1. (a) The agreement requires equal rental payments at the end of each year.
2. (b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value to Action is $2,500,000.
3. (c) The building has an estimated economic life of 10 years, with no residual value. J & J depreciates similar buildings on the straight-line method.
4. (d) At the termination of the lease, the title to the building will be transferred to the lessee.
5. (e) CPA's incremental borrowing rate is 11% per year. Action set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by J & J.
6. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
Required:
1. What is the amount of the minimum annual lease payment?
2. What is the amount of the total annual lease payment?
3. Give J & J's initial entry for the lease in 2008.
4. Give Action's initial entry for the lease in 2008.