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Chapter 21: Q12BE (page 1240)

On January 1, 2017, Irwin Animation sold a truck to Peete Finance for \(33,000 and immediately leased it back. The truck was carried on Irwin鈥檚 books at \)28,000. The term of the lease is 5 years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of $8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a useful life of 5 years with no salvage value. Prepare Irwin鈥檚 2017 journal entries.

Short Answer

Expert verified

Leased equipment is $33,000

Accumulated depreciation is $6,600

Depreciation expense is $1,000

Step by step solution

01

Meaning of Leaseback

The term leaseback is an agreement in which a firm sells the asset while obtaining a long-term lease from the buyer for the continued use of the deeded asset. It is a process that involves selling an item and then leasing a portion of that assetback to the seller for future use.

02

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Cash

33,000

Trucks

28,000

Unearned Profit on Sales

Leaseback

5,000

Leased Equipment

33,000

Lease Liability

33,000

Working Notes:-

Calculation of Leased Equipment

Leasedequipment=Rentalpayments脳Presentvalueofannuity=$8,705脳3.79079=$33,000

Note:$1 difference due to rounding

Present value of an annuity due of 1 for 5 periods at 10%

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

6,600

Accumulated Depreciation

Capital Leases

6,600

Unearned Profit on Sale

Leaseback

1,000

Depreciation Expense

1,000

Interest Expense

3,300

Lease Liability

5,405

Cash

8,705

Working Notes:-

Calculation of Accumulated depreciation

Accumulateddepreciation =EquipmentvalueUsefullife=$33,0005=$6,600

Calculation of Depreciation expense

Depreciationexpense =UnearnedprofitonsalesUsefullife=$5,0005=$1,000

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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.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

(2) Sales price.

Alice Foyle, M.D. (lessee), has a noncancelable 20-year lease with Brownback Realty, Inc. (lessor) for the use of a medical building. Taxes, insurance, and maintenance are paid by the lessee in addition to the fixed annual payments, of which the present value is equal to the fair value of the leased property. At the end of the lease period, title becomes the lessee鈥檚 at a nominal price. Considering the terms of the lease described above, comment on the nature of the lease transaction and the accounting treatment that should be accorded it by the lessee.

How should changes in the estimated unguaranteed residual value be handled by the lessor?

The following are four independent situations.

(d) On January 1, 2017, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was \(212,700, the carrying amount is \)300,000, the monthly rental under the lease is \(6,000, and the present value of the rental payments is \)115,753. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction.
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