Question

On January 1, 2010, Mason Co. entered into a 12-year lease on a building. The lease contract requires (1) annual (prepaid) rental payments of \(36,000 each January 1 throughout the life of the lease and (2) for the lessee to pay for all additions and improvements to the leased property. On January 1, 2017, Mason decides to sublease the space to Stewart Co. for the remaining five years of the lease—Stewart pays \)40,000 to Mason for the right to sublease and agrees to assume the obligation to pay the \(36,000 annual rent to the building owner beginning January 1, 2017. After taking possession of the leased space, Stewart pays for improving the office portion of the leased space at a \)20,000 cost. The improvements are paid for by Stewart on January 3, 2017, and are estimated to have a useful life equal to the 13 years remaining in the life of the building.

Required

1. Prepare entries for Stewart to record (a) its payment to Mason for the right to sublease the building space, (b) its payment of the 2017 annual rent to the building owner, and (c) its payment for the office improvements.
2. Prepare Stewart’s year-end adjusting entries required on December 31, 2017, to (a) amortize the $40,000 cost of the sublease, (b) amortize the office improvements, and (c) record rent expense.

Short answer

1. The journal entries are given below
2. The journal entries are given below

Step-by-step solution

(1) Journal entries        

1. its payment to Mason for the right to sublease the building space

Jan 01	Leasehold	$40,000
	Cash		$40,000
	Record leasehold

1. its payment of the 2017 annual rent to the building owner

Jan 01	Prepaid rent	$36,000
	Cash		$36,000
	Record prepaid rent

1. its payment for the office improvements

Jan 03	Leasehold improvement	$20,000
	Cash		$20,000
	Record leasehold improvement

(2) Journal entries

(a) amortize the $40,000 cost of the sublease

Dec 31	Amortization expense	$8,000
	Accumulated amortization- leasehold		$8,000
	Record amortization

Note:

$\mathit{a}\mathit{m}\mathit{o}\mathit{r}\mathit{t}\mathit{i}\mathit{z}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}$

$\mathit{a}\mathit{m}\mathit{o}\mathit{r}\mathit{t}\mathit{i}\mathit{z}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{40}\mathbf{,}\mathbf{000}}{\mathbf{5}}$

$\mathbf{=}\mathit{\$}\mathbf{8}\mathbf{,}\mathbf{000}$

(b) amortize the office improvements

Dec 31	Amortization expense	$4,063
	Accumulated amortization- office improvement		$4,063
	Record amortization

Note:

$\mathit{a}\mathit{m}\mathit{o}\mathit{r}\mathit{t}\mathit{i}\mathit{z}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}$

$\mathit{a}\mathit{m}\mathit{o}\mathit{r}\mathit{t}\mathit{i}\mathit{z}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{20}\mathbf{,}\mathbf{000}}{\mathbf{13}}$

$\mathbf{=}\mathit{\$}\mathbf{1}\mathbf{,}\mathbf{538}$

(c) record rent expense

Dec 31	Rent expense	$36,000
	Accumulated amortization- leasehold		$36,000
	Record rent expense