On January 1, 2018, McCaffrey Inc

question 57

Essay

On January 1, 2018, McCaffrey Inc. leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $320,000 each, beginning December 31, 2018, and at each December 31 through 2020. The lessor, Lowell Leasing, routinely finances equipment for other firms at an annual interest rate of 5%. McCaffrey also paid a $400,000 advance payment at the beginning of the lease in addition to the first $320,000 rent payment. With permission of the owner, McCaffrey made structural modifications to the building before occupying the space at a cost of $720,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value.
Required:
Prepare the appropriate journal entries for McCaffrey Inc. from the beginning of the lease through the end of 2018. McCaffrey's fiscal year is the calendar year. Round your answers to the nearest whole dollar amounts.

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Definitions:

Dividend Income

Income from dividends, which are payments made by a corporation to its shareholder members. It is often derived from the company's profits.

Cost of Equity

The rate of return that a company must offer investors to compensate for the risk of investing in its equity.

Flotation Costs

Expenses incurred by a company in issuing new securities, including underwriting, legal, and registration fees.

Dividends Low

This term implies a situation where a company issues dividends at a lower rate or amount, possibly reflecting a strategy to reinvest earnings into the business or an indication of financial conservation.