On January 1, 2018, Morris Company sells land to Lopez Corporation for $8,150,90

Question

On January 1, 2018, Morris Company sells land to Lopez Corporation for $8,150,900, and immediately leases the land back. The following information relates to this transaction: 1 The term of the noncancelable lease is 21 years and the title transfers to Morris Company at the end of the lease term. 2. The land has a cost basis of $6,719,700 to Morris. 3. The lease agreement calls for equal rental payments of $755,000 at the beginning of each year. 4. The land has a fair value of $8,204,900 on January 1, 2018. 5. The incremental borrowing rate of Morris Company is 11%. Morris is aware that Lopez Corporation set the annual rentals to ensure rate of return of 7% 6. Morris Company pays all executory costs which total $255,300 in 2018. 7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Prepare the journal entries for the entire year 2018 on the books of Morris Company to reflect the above sale and lease transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.) Debit Credit January 1, 2018 To record sale) January 1, 2018 To record lease) roughout 2018 December 31, 2018 (To record amortization of profit on sale) December 31, 2018 To record interest payment)

Explanation / Answer

Date General Journal Debit Credit 01/01/2018 Cash 8150900 Land 6719700 Unearned Profit on Sale-Leaseback 1431200 01/01/2018 Leased Land Under Capital Leases 8204900 Lease Liability 8204900 01/01/2018 Executory Costs (Insurance and Taxes) 255300 Accounts Payable and Cash 255300 01/01/2018 Unearned Profit on Sale-Leaseback 68152 Revenue from Sale-Leaseback ($1,431,200 ÷ 21) 68152 01/01/2018 Interest Expense 574343 Lease Liability 180657 Cash 755000 Date Annual Lease Payament Interest 7 % Reduction of Lease Obligation Balance 01/01/2018 8204900 12/31/2018 755000 574343 180657 8024243 Date General Journal Debit Credit 01/01/2018 Land 8204900 Cash 8204900 01/01/2018 Lease Receivable 8204900 Land 8204900 12/31/2018 Cash 755000 Lease Receivable 180657 Interest Revenue 574343

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