On January 1, 2019, Marshall Company (MC) signs a 10-yearagreement to lease a standard non-specialized storage building fromHammer, Inc. The following information pertains to this leaseagreement: a. The agreement requires rental payments of $120,000 atthe beginning of each year. b. The carrying value of the buildingon January 1, 2019 is $2 million. c. The fair value of the buildingon January 1, 2019 is $2.5 million. d. The building has a remainingestimated economic life of 50 years, with no residual value. Hammerdepreciates similar buildings using the straight-line method. e.The lease does not contain a renewable option clause. At thetermination of the lease, the building reverts to the lessor. f.MC’s incremental borrowing rate is 14% per year. Hammer has set theannual rental payments to ensure an 11% rate of return (this rateis disclosed in the lease agreement). g. Executory costs are$25,000 annually, related to taxes on the property and maintenance,and will be paid by Hammer on October 1 each year. h. Both entitieshave fiscal year-ends on December 31 and have adopted ASC 842.Instructions a) List each Group I lease classification criteria anddetermine the appropriate lease accounting treatment for both MCand Hammer. b) Provide journal entries for both MC and Hammer in2019
