Chapter 8, Problem 8AP

1.

To determine

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.

Explanation of Solution

Journal entry:

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, 2017	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 2017 annual rent to the building owner

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 1, 2017	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, 2017	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.

To determine

Prepare the year-end adjusting journal entries required at December 31, 2017 to (a) amortize the $200,000 cost of the sublease, (b) amortize the office improvements, and (c) record rent expense.

Explanation of Solution

Prepare the year-end adjusting journal entries required at December 31, 2017 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, 2017	Rent expense (1)		10,000
	Accumulated depreciation-leasehold			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

$\begin{array}{c}\text{Rent expense}=\left[\begin{array}{l}\left[\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\right]\times \\ \left[\frac{\left(\begin{array}{l}\text{Number of months }\\ \text{between July to December}\end{array}\right)}{\text{Number of months in a year}}\right]\end{array}\right]\\ =\left[\frac{\$200,000-\text{\$0}}{\text{10 Years}}\right]\times \frac{6}{12}\\ =\$10,000\end{array}$ (1)

(b) Amortize the office improvements

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2017	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

$\begin{array}{c}\text{Annual Depreciation}=\left[\begin{array}{l}\left[\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\right]\times \\ \left[\frac{\left(\begin{array}{l}\text{Number of months }\\ \text{between July to December}\end{array}\right)}{\text{Number of months in a year}}\right]\end{array}\right]\\ =\left[\frac{\$130,000-\text{\$0}}{\text{10 Years}}\right]\times \frac{6}{12}\\ =\$6,500\end{array}$ (2)

(c) Record rent expense:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
December 31, 2017	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

$\begin{array}{c}\text{Rent expense}=\left[\begin{array}{l}\text{Value of prepaid rent}\times \\ \left[\frac{\left(\begin{array}{l}\text{Number of months }\\ \text{between July to December}\end{array}\right)}{\text{Number of months in a year}}\right]\end{array}\right]\\ =\$80,000\times \frac{6}{12}\\ =\$40,000\end{array}$ (3)