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NEED HELP WITH JOURNAL ENTRIES. On January 1, 2019, Caswell Company signs a 10-year cancelable (at the option of either party) agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement: (THE FIRST JOURNAL HAS 9 ENTRIES, THE SECOND HAS 7)

1.	The agreement requires rental payments of $100,000 at the beginning of each year.
2.	The cost and fair value of the building on January 1, 2019, is $2 million. The storage building has not been specialized for Caswell.
3.	The building has an estimated economic life of 50 years, with no residual value. Caswell depreciates similar buildings according to the straight-line method.
4.	The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor.
5.	Caswells incremental borrowing rate is 14% per year. Wake set the annual rental to ensure a 16% rate of return (the loss in service value anticipated for the term of the lease). Caswell knows the implicit interest rate.
6.	Executory costs of $7,000 annually, related to taxes on the property, are paid by Caswell directly to the taxing authority on Dec. 31 of each year.

Required:

1.	Determine what type of lease this is for the lessee.
2.	Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019 and 2020.

Determine what type of lease this is for the lessee.

Classification Criteria	Met
Transfer of ownership at end of lease	No
Bargain purchase option	No
Lease term is for a major part of economic life	No
Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value	No
Specialized nature of the asset	No

Determine what type of lease this is for Caswell.

Operating lease

2. Prepare appropriate journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease on December 31 for the years 2019 and 2020.

General Journal Instructions

PAGE 2019

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

Record the payments and expenses related to this lease on December 31 for 2020.

PAGE 2020

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7

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