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On January 1, 2014, XYZ Company leased a building to Silver Trading Inc. The lease arrangement is for 10 years. The leased building cost $4,000,000 and was purchased for cash on January 1, 2014. The building is depreciated on a straight-line basis. Its estimated economic life is 40 years with no salvage value. Lease payments are $250,000 per year and are made at the beginning of the year. Silver's incremental borrowing rate is 8%, which is the same as XYZ's implicit rate. Both the lessor and the lessee are on a calendar-year basis. Which of the following accounting treatment is wrong and why?

XYZ should recognize rent revenue of $250,000 in year 2014
Silver Trading should recognize rent expense of $250,000 in year 2014
XYZ should recognize depreciation expense of $100,000 in year 2014
Silver should recognize depreciation expense of $100,000 in year 2014

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9800974

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