Question: (Basic Lessee Accounting with Difficult PV Calculation) In 2016, Grishell Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2017, Grishell Trucking Company took possession of the lease properties. On January 1, 2017 and 2018, the company made cash payments of \(948,000 that were recorded as rental expenses.

Although the terminals have a composite useful life of 40 years, the noncancelable lease runs for 20 years from January 1, 2017, with a bargain-purchase option available upon expiration of the lease.

The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental payments of \)800,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of \(320,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for \)1 on December 31, 2036. It also must make annual payments to the lessor of \(125,000 for property taxes and \)23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return.

Instructions

(b) Assuming that the present value of terminal facilities and related obligation at January 1, 2017, was \(7,600,000, prepare journal entries for Grishell Trucking Company to record the:

1) Cash payment to the lessor on January 1, 2019.

Selected present value factors are as follows.

Periods	For an Ordinary Annuity of \)1 at 6%	For $1 at 6%
1	.943396	.943396
2	1.83393	.889996
8	6.209794	.627412
9	6.801692	.591898
10	7.360087	.558395
19	11.158117	.330513
20	11.469921	.311805

Step by step solution

01

Step-by-Step Solution Step 1: Meaning of Lease Liability

Lease liability means the amount of the lease liabilityin respect of any lease that would be required to be included in the statement of financial positionprepared in accordance with the IFRS at the time of any determination and shall have a maturity period before the first date of such lease.

02

Preparing journal entry of Grishell Trucking Company

Date	Particular	Debit ($)	Credit ($)
Jan. 1, 2019	Interest Payable	384,480
	Lease Liability	415,520
	Property Tax Expense	125,000
	Insurance Expense	23,000
	Cash		948,000

Working notes:

Preparing partial Amortization Schedule

		Partial Amortization Schedule (Annuity-Due Basis
Date	Lease Payment	Executory Costs	Interest (6%) On Lease Liability	Reduction Of Lease Liability	Lease Liability
1/1/17	$ 0	$ 0	$ 0	$ 0	$7,600,000
1/1/17	948,000	148,000	0	800,000	6,800,000
1/1/18	948,000	148,000	408,000	392,000	6,408,000
1/1/19	948,000	148,000	384,480	415,520	5,992,480
1/1/20	948,000	148,000	359,549	440,4515	5,552,029

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