1.
Prepare journal entries to record (a) its payment to Company F for the right to sublease the building space, (b) its payment of the 2015 annual rent to the building owner, and (c) its payment for the office.
1.
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Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.
- Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.
Prepare journal entries to record (a) its payment to Company F for the right to sublease the building space, (b) its payment of the 2017 annual rent to the building owner, and (c) its payment for the office as follows:
(a) Payment to Company F for the right to sublease the building space.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
June 25, 2015 | Leasehold | 200,000 | ||
Cash | 200,000 | |||
(To record the amount of $200,000 paid for sublease) |
Table (1)
- Leasehold is an asset account and it increases the value of asset by $200,000. Therefore, debit leasehold account for $200,000.
- Cash is an asset account and it decreases the value of asset by $200,000. Therefore, credit Cash account for $200,000.
b) Payment of the 2015 annual rent to the building owner
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
July 1, 2015 | Prepaid rent | 80,000 | ||
Cash | 80,000 | |||
(To record prepaid annual lease rent paid in cash) |
Table (2)
- Prepaid rent is an asset account and it increases the value of asset by $80,000. Therefore, debit prepaid rent account for $80,000.
- Cash is an asset account and it decreases the value of asset by $80,000. Therefore, credit Cash account for $80,000.
(c) Payment made for the office
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
July 5, 2015 | Leasehold improvement | 130,000 | ||
Cash | 130,000 | |||
(To record cash paid for leasehold improvement) |
Table (3)
- Leasehold improvement is an asset account and it increases the value of asset by $130,000. Therefore, debit leasehold improvement account for $130,000.
- Cash is an asset account and it decreases the value of asset by $130,000. Therefore, credit Cash account for $130,000.
2.
Prepare the year-end
2.
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Explanation of Solution
Prepare the year-end adjusting journal entries required at December 31, 2015 to (a) amortize the $200,000 cost of the sublease, (b) amortize the office improvements, and (c) record rent expense as follows:
(a) Amortize the $200,000 cost of the sublease
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31, 2015 | Rent expense (1) | 10,000 | ||
| 10,000 | |||
(To record leasehold amortization incurred at the end of the first year) |
Table (4)
- Rent expense is an expense account, and it decreases the value of equity. Hence, debit the rent expense by $10,000.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $10,000.
Working note:
Calculate the rent expense incurred for leasehold
(b) Amortize the office improvements
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31, 2015 | Amortization expense-Leasehold improvements (2) | 6,500 | ||
Accumulated depreciation-Leasehold improvements | 6,500 | |||
(To record amortization expense incurred at the end of the year) |
Table (5)
- Amortization expense is an expense account, and it decreases the value of equity. Hence, debit the amortization expense by $6,500.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit accumulated depreciation by $6,500.
Working note:
Compute the amortization expenses
(c) Record rent expense:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31, 2015 | Rent expense (3) | 40,000 | ||
Prepaid rent expense | 40,000 | |||
(To record rent expense incurred at the end of the year ) |
Table (6)
- Rent expense is an expense account, and it decreases the value of equity. Hence, debit the rent expense by $40,000.
- Prepaid rent is an asset, and it decreases the value of assets. Therefore, credit prepaid rent by $40,000.
Working note:
Calculate the rent expense incurred for leasehold
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