On January 1, 2011, Morrison Corp. leased a building to Wisen Inc. Both companies use IFRS. The relevant information on the lease is as follows

On January 1, 2011, Morrison Corp. leased a building to Wisen Inc. Both companies use IFRS. The relevant information on the lease is as follows:

1. The lease arrangement is for 10 years.

2. The leased building cost $5.5 million and was purchased by Morrison for cash on July 1, 2011.

3. The building is amortized on a straight-line basis. Its estimated economic life is 40 years.

4. Lease payments are $325,000 per year and are made at the end of the lease year, and so the first lease payment was made June 30, 2012.

5. Property tax expense of $57,000 and insurance expense of $11,000 on the building were incurred by Morrison for the 2011 fiscal year. Payment for these two items was made on July 1, 2011.

6. Both the lessor and the lessee have their fiscal years on a calendar-year basis.

Instructions

(a) Prepare the journal entries and any year-end adjusting journal entries made by Morrison Corp. in 2011.

(b) Prepare the journal entries and any year-end adjusting journal entries made by Wisen Inc. in 2011.

(c) If Morrison paid $30,000 to a real estate broker on July 1, 2011, as a fee for finding the lessee, how much should Morrison Corp. report as an expense for this fee item in 2011?

(d) Would any of the accounting treatment you have provided in (a) through (c) above change if Morrison had been using private enterprise GAAP?

(a) Entries for Morrison Corp. are as follows:

1/7/11  Building (Leased)............ 5,500,000

             Cash ....................           5,500,000

        Property Tax Expense.........    57,000

        Insurance Expense............    11,000

             Cash ....................               68,000

12/31/11 Rent Receivable..............   162,500

             Rental Income...........             162,500

             ($325,000 X 6 / 12 = $162,500)

        Depreciation Expense.........    68,750

             Accumulated Depreciation

               —Building..............               68,750

              [($5,500,000 ÷ 40) X 6 / 12 = $68,750]

(b) Entries for Wisen Inc. are as follows:

12/31/11 Rent Expense.................   162,500

             Rent Payable............              162,500

(c) The real estate broker’s fee should be amortized equally over the 10-year period. As a result, real estate fee expense of $1,500 ($30,000 ÷ 10 X 6 ÷ 12) should be reported as an expense in 2011 and $3,000 per year for each of the next nine years until the last year of the lease when the expense will be $1,500.

(d)  None of the accounting treatment above would change if Morrison were to use private enterprise GAAP.