On January 1, 2020, LeRoy Inc. signs a 10 year cancelable agreement to lease a storage building from Terrace Company. The following are the information pertains to this lease agreement: The agreement requires rental payments of $100,000 at the beginning of each year. The cost and fair value of the building on January 1, 2020, is $3 million. The building is not specialized for LeRoy Incorporation. The building has an estimated economic life of 50 years, with no residual value. The lease does not contain a renewable option. LeRoy’s incremental borrowing rate is 14% per year. Executory costs of $5,000 annually, related to taxes on the property, are paid by LeRoy directly to the taxing authority on December 31 of each year. Required a. Determine what type of lease this is for Terrace (lessor) and explain why. b. Please explain how Terrace will record this asset on its books
On January 1, 2020, LeRoy Inc. signs a 10 year cancelable agreement to lease a storage building from Terrace Company. The following are the information pertains to this lease agreement:
The agreement requires rental payments of $100,000 at the beginning of each year.
The cost and fair value of the building on January 1, 2020, is $3 million. The building is
not specialized for LeRoy Incorporation.
The building has an estimated economic life of 50 years, with no residual value.
The lease does not contain a renewable option.
LeRoy’s incremental borrowing rate is 14% per year.
Executory costs of $5,000 annually, related to taxes on the property, are paid by LeRoy directly to the taxing authority on December 31 of each year.
Required
a. Determine what type of lease this is for Terrace (lessor) and explain why.
b. Please explain how Terrace will record this asset on its books
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