On January 1, 2004, Liberty Co. entered into a 12 year lease on a building. The lease contract requires (1) annual (prepaid) rental payments of $26,400 each January 1 throughout the life of the lease and (2) for the lessee to pay for all additions and improvements to the leased property. On January 1, 2011, Liberty decides to sublease the space to Moberly Co. for the remaining five years of the lease — Moberly pays $30,000 to Liberty for the right to sublease and agrees to assume the obligation to pay the $26,400 annual rent to the building owner beginning January 1, 2011. After taking possession of the leased space, Moberly pays for improving the office portion of the leased space at an $18,000 cost. The improvements are paid for by Moberly on January 3, 2011, and are estimated to have a useful life equal to the 13 years remaining in the life of the building.
1. Prepare entries for Moberly to record
(a) its payment to Liberty for the right to sublease the building space,
(b) its payment of the 2011 annual rent to the building owner,
(c) its payment for the office improvements.
2. Prepare Moberly’s year end adjusting entries required on December 31, 2011, to
(a) amortize the $30,000 cost of the sublease,
(b) amortize the office improvements,
(b) record rent expense.