hamrock, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $40,000 from United Corporation. The agreement stipulates the following. ● Rental payments of $9,435 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease. ● Shamrock must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year. ● Shamrock must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse. ● Shamrock paid legal fees of $3,000 in executing the lease. Assuming Shamrock’s incremental borrowing rate is 9% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Shamrock. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.) Click here to view factor tables. Account Titles and Explanation Debit Credit Right-of-Use Asset cash Lease Liability

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Shamrock, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $40,000 from United Corporation. The agreement stipulates the following.

●		Rental payments of $9,435 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease.
●		Shamrock must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $800, though these costs vary from year to year.
●		Shamrock must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse.
●		Shamrock paid legal fees of $3,000 in executing the lease.

Assuming Shamrock’s incremental borrowing rate is 9% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Shamrock. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Click here to view factor tables.

Account Titles and Explanation	Debit	Credit
Right-of-Use Asset
cash
Lease Liability

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