Chapter 10, Problem 8BPSB

Requirement 1

To determine

To prepare:

Journal entries for Stewart for −

1. Payment to Mason for the right to sublease the building space
2. Its payment of the 2015 annual rent
3. Its payment for the office improvements

Answer to Problem 8BPSB

Solution:

The requirement journal entries are −

	Accounts Titles and Descriptions	Debit	Credit
a.	Leasehold	40,000
	Cash		40,000
	(To record the payment paid for sublease of the building space)
b.	Prepaid Rent	36,000
	Cash		36,000
	(To record the rent paid in advance for the year)
c.	Leasehold Improvements	20,000
	Cash		20,000
	(To record cost of leasehold improvements for $ 20,000)

Explanation of Solution

The above journal entries can be explained as under −

The leasehold is debited with the amount $ 40,000 as it is paid for the right to sublease the building space. The cash is credited with $ 40,000.

The rent is paid for the full year. Since, it is paid in advance for the whole year, thus, prepaid rent account is debited and the cash is credited for $ 36,000.

The leasehold improvements are incurred and thus recorded with $ 20,000 and the cash is credited with $ 20,000

Conclusion

Thus, the journal entries for Stewart for payment to Mason for the right to sublease the building space, its payment of the 2015 annual rent and its payment for the office improvements have been prepared.

Requirement 2

To determine

To prepare:

Adjusting journal entries to −

1. To amortize the $ 40,000 cost of the sublease
2. To amortize the office improvement
3. To record rent expense

Answer to Problem 8BPSB

Solution:

The required adjusting journal entries are −

	Accounts Titles and Descriptions	Debit	Credit
a.	Rent Expense	8,000
	Accumulated amortization - Leasehold		8,000
	(To record amortization of $ 40,000 cost of sublease)
b.	Amortization expense - Leasehold Improvements	4,000
	Accumulated amortization - Leasehold Improvements		4,000
	(To record amortization of leasehold improvements)
c.	Rent Expense	36,000
	Prepaid Rent		36,000
	(To record adjustment entry for rent expense)

Explanation of Solution

The above journal entries can be explained as under −

1. The amount paid for the right to sublease will be amortized using the remaining life of the asset and the months expired in the year 2015.
Given,
• Amount paid for the right to sublease = $ 40,000
• Remaining life of lease = 5 years
• Months expired in 2015 = 12 months (i.e. from January to December)
The amount to be amortized will be calculated as −

  $\begin{array}{l}Amortizedamount=\left(\frac{Amountpaid}{Remaininglifeoflease}\right)X\left(\frac{Monthsexpiredin2015}{12months}\right)\hfill \\ Amortizedamount=\left(\frac{\$\text{ 4}0,000}{\text{5 }years}\right)X\left(\frac{\text{ 12 }months}{12months}\right)\hfill \\ Amortizedamount=\$\text{ 8},000\hfill \end{array}$

The rent expense will be debited with $ 8,000 and Accumulated amortization − Leasehold will be credited with $ 8,000


1. The amount paid for the office improvement will be amortized using the remaining life of the asset and the months expired in the year 2015.
Given,
• Amount paid for office improvement = $ 20,000
• Remaining life of lease = 5 years
• Months expired in 2015 = 12 months (i.e. from January to December)
The amount to be amortized will be calculated as −

  $\begin{array}{l}Amortizedamount=\left(\frac{Amountpaid}{Remaininglifeoflease}\right)X\left(\frac{Monthsexpiredin2015}{12months}\right)\hfill \\ Amortizedamount=\left(\frac{\$\text{ 20},000}{\text{5 }years}\right)X\left(\frac{\text{ 12 }months}{12months}\right)\hfill \\ Amortizedamount=\$\text{ 4},000\hfill \end{array}$

The Amortization expense - Leasehold Improvements will be debited with $ 4,000 and Accumulated amortization - Leasehold Improvements will be credited with $ 4,000.


2. Now, the rent expense will be calculated as −
Given,
• Prepaid Rent = $ 36,000
• Months expired in 2015 =12 months (i.e. from January to December)

  $\begin{array}{l}RentExpense=PrepaidRentX\left(\frac{\text{ 12 }months}{12months}\right)\\ RentExpense=\$\text{ 36},000\end{array}$

The rent expense will be debited with $ 36,000 and prepaid rent will be credited with $ 36,000.

Conclusion

Thus, the adjusting journal entries to amortize the $ 40,000 cost of the sublease, to amortize the office improvement and to record rent expense have been prepared