Co. B (lessee) enters into a 10-year lease of a floor of a building, with an option to extend for five years on 1 January 20x1. Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period, all payable at the beginning of each year.

To obtain the lease, Co. B incurs initial direct costs of $20,000. As an incentive to Co. B for entering into the lease, the lessor agrees to reimburse to Co. B the real estate commission of $5,000.  

At the commencement date, Co. B concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines that the lease term is 10 years.  

The interest rate implicit in the lease is not readily determinable. Co. B's incremental borrowing rate is 5 percent per annum, which reflects the fixed rate at which it could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 10-year term, and with similar collateral.

Assume Co. B recognizes the lease, adopts cost model and straight-line depreciation.

Required:

Prepare appropriate journal entries for Co. B for the year 20x1. Assume a December 31 year-end.