On January 1, 2004, Palos Co. entered into a 12-year lease on a building. The lease contract requires (1) annual (prepaid) rental payments of $90,000 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, Palos decides to sublease the space to Callahan Co. for the remaining five years of the lease—Callahan pays $200,000 to Palos for the right to sublease and agrees to assume the obligation to pay the $90,000 annual rent to the building owner beginning January 1, 2011. After taking possession of the leased space, Callahan pays for improving the office portion of the leased space at a $150,000 cost. The improvements are paid for by Callahan on January 3, 2011, and are estimated to have a useful life equal to the 13 years remaining in the life of the building.
Required
1. Prepare entries for Callahan to record.
(a) Its payment to Palos 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 Callahan’s year-end adjusting entries required on December 31, 2011, too.
(a) Amortize the $200,000 cost of the sublease.
(b) Amortize the office improvements.
(c) Record rent expense.