To raise operating funds, North American Courier Corporation sold its building o

Question

To raise operating funds, North American Courier Corporation sold its building on January 1, 2016, to an insurance company for $640,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2025, at which time ownership of the building will revert to North American Courier. The building has a book value of $500,000 (original cost $1,000,000). The lease requires North American to make payments of $108,673 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 11%.

Prepare the appropriate entries for North American on (a) January 1, 2016, to record the sale-leaseback and (b) December 31, 2016, to record necessary adjustments

Show how North American’s December 31, 2016, balance sheet and income statement would reflect the sale-leaseback.

Prepare the appropriate entries for North American on (a) January 1, 2016, to record the sale-leaseback and (b) December 31, 2016, to record necessary adjustments

Show how North American’s December 31, 2016, balance sheet and income statement would reflect the sale-leaseback.

Explanation / Answer

1. 1 jan,2016

a) Dr. Cash 640000

Cr.building 500000

Cr.Deferred gain 140000

(to record the sale transaction)

b) Dr. Leased building 640000

Cr. Leased Liability 640000

2. 31st dec,2016

a) Dr. Interest expense(640000*11%) 70400

Dr. lease liability 38273

Cr. Cash 108673

b) Dr. Depreciation of leased asset 64000

Cr. accumlated depn. of leased asset 64000

(being depn charged on straight line basis on leased asset

c) Dr. Deferred gain 14000

Cr. Profit in sale of leased asset 14000

(to recognise deferred gain on straight line basis)

Income Statement:

1. deferred gain recognised as income $14000

2. Lease rent payment of $108673 is recorded as expense.

Balance sheet:

1. leased asset will be recorded at $640000 less accumulated depreciation for the year

2. Deferred gain to the portion not amortised in income statement is shown as deferred gain

3. lease liability of $640000 will be recorded as liability

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