On January 1,2018,Allied Fittings Signed a Long-Term Rental Agreement with KM

question 7

Essay

On January 1,2018,Allied Fittings signed a long-term rental agreement with KM Properties for the exclusive right to use a building for a period of 10 years at a rental rate of $2.5 million per year paid at the beginning of each year.The building has fair market value of $40 million,a 20-year life and the agreement includes an option for Allied to purchase the property for $20 million at the end of the lease,when the property would be expected to increase in value to $50 million.Allied's accounting staff recorded the lease as an operating lease.
In 2020,management realized that the lease should have been recorded as a capital lease due to the bargain purchase option.Allied has a calendar year-end.The books for 2020 have not been closed.The company has an incremental borrowing rate of 6%,and depreciates similar property on a straight-line basis with full depreciation taken in the first year.
Required:
a.Record the adjusting entries necessary to reflect the lease as a finance lease on December 31,2020.