Question

(Accounting for an Operating Lease) On January 1, 2017, 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 \(4,500,000 and was purchased for cash on January 1, 2017.
3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
4. Lease payments are \)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 was made at the end of the year.
6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

(c) If Nelson paid $30,000 to a real estate broker on January 1, 2017, as a fee for finding the lessee, how much should Nelson Co. report as an expense for this item in 2017?

Short answer

In each period $3,000 should be reported as an expense.

Step-by-step solution

Meaning of Lessee

The person who has the right to use the property on lease is called the lessee. A lessee receives property or equipment from a lessor who owns the asset. The lessee has an obligation to repay the lease amount to the lessor.

Explaining the report of Nelson Co. for recording expense

The real estate broker’s fee should be capitalized and amortized equally over the 10-year period. As a result, a real estate fee expense of $3,000 should be reported in each period.

Calculation of fee expense

$$\begin{gathered} \mathrm{Real}\mathrm{Estate}\mathrm{Fee}\mathrm{expense}=\frac{\mathrm{Total}\mathrm{Real}\mathrm{Estate}\mathrm{amount}}{\mathrm{Lease}\mathrm{arrangements}\mathrm{years}} \\ =\frac{\$30,000}{10} \\ =\$3,000 \end{gathered}$$