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Chapter 21: Q 7CA_b(1) (page 1253)

(Sale-Leaseback) On January 1, 2017, Perriman Company sold equipment for cash and leased it back. As seller-lessee, Perriman retained the right to substantially all of the remaining use of the equipment.

The term of the lease is 8 years. There is a gain on the sale portion of the transaction. The lease portion of the transaction is classified appropriately as a capital lease.

Instructions

(b) (1) How should Perriman account for the sale portion of the sale-leaseback transaction at January 1, 2017?

Short Answer

Expert verified

Answer

Perriman should account for the sale portion of the sale-leaseback transaction.

Step by step solution

01

Step-by-Step Solution

Step 1: Meaning of sale-leaseback

When a seller sells an asset to a buyer and subsequently leases it back from the buyer, this is known as a sale and leaseback deal. This arrangement is most prevalent when the seller needs the cash connected with the asset being sold while also requiring the space to be occupied.

02

Explaining the Perriman account for the sale portion of the sale-leaseback transaction on January 1, 2017

On January 1, 2017, Perriman should account for the sale portion of the sale-leaseback transaction by recording cash for the sale price, decreasing equipment at the equipment's undepreciated cost (net carrying amount), and establishing a deferred gain on sale-leaseback for the excess of the equipment's sale price over its undepreciated cost (net carrying amount).

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Most popular questions from this chapter

A lease agreement between Mooney Leasing Company and Rode Company is described in E21-8.

Inception date

May 1, 2017

Annual lease payment due at the beginning

of each year, beginning with May 1, 2017

\(21,227.65

Bargain-purchase option price at end of lease term

\) 4,000.00

Lease term

5 years

Economic life of leased equipment

10 years

Lessor鈥檚 cost

\(65,000.00

Fair value of asset at May 1, 2017

\)91,000.00

Lessor鈥檚 implicit rate

10%

Lessee鈥檚 incremental borrowing rate

10%

Instructions

(Round all numbers to the nearest cent.) Refer to the data in E21-8 and do the following for the lessor.

(b) Prepare a lease amortization schedule for Mooney Leasing Company for the 5-year lease term.

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston鈥檚 specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2017, and requires annual rental payments of \(413,971 each January 1, starting January 1, 2017.

Winston鈥檚 incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is \)2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Instructions

(b) Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Winston Industries.

Morgan Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
  2. The cost of the asset to the lessor is \(245,000. The fair value of the asset at January 1, 2017, is \)245,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed.
  4. Cole Company assumes direct responsibility for all executory costs.
  5. The agreement requires equal annual rental payments, beginning on January 1, 2017.
  6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Instructions

(Round all numbers to the nearest cent.)

(a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (Round to the nearest dollar.)

Geiberger Corporation manufactures replicators. On January 1, 2017, it leased to Althaus Company a replicator that had cost \(110,000 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of \)40,800 payable each January 1, beginning January 1, 2017. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs. Prepare Geiberger鈥檚 January 1, 2017, journal entries.

The residual value is the estimated fair value of the leased property at the end of the lease term.

(a) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessee鈥檚 accounting for a capitalized-lease transaction?
See all solutions

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