Owing to low liquidity, Lisa plc decides on 1 July 2015 to sell its land and bui
ID: 2489196 • Letter: O
Question
Owing to low liquidity, Lisa plc decides on 1 July 2015 to sell its land and buildings to Anderson plc. The carrying values of the land and buildings in the books of Lisa plc, at 1 July 2015, are: LO 10.3 Land, at cost €1,800,000 Buildings, at cost €1,750,000 Accumulated depreciation €350,000 The land and buildings are sold for €4,334,700 (their fair value), with the amount being allocated equally as follows: Land €2,167,350 Buildings €2,167,350 Immediately following the sale, Lisa plc decides to lease back the land and buildings from Anderson plc. The term of the lease is 20 years. The implicit interest rate in the lease is 12 per cent. It is expected that the buildings will be demolished at the end of the lease term. The lease is non-cancellable, returns the land and buildings to Anderson plc at the end of the lease and requires the following lease payments: Payment on inception of the lease on 1 July 2015 €600,000 Payment on 30 June each year starting 30 June 2016 €500,000 There is no residual payment required. (a) Provide the entries for the sale and lease in the books of Lisa plc as at 1 July 2015. (b) Provide the entries for the purchase and lease in the books of Anders
Explanation / Answer
This is a case of sale and opearting leaseback
(A) Entries in books of Lisa plc
On 01-07-2015 Cash A/c________Dr. €4334700
To Land A/c______________ €1800000
To Building A/c ___________€1400000
To Income Statement A/c___€1134700*
(Being Land and Building Sold)
* Cr Income Statement with (fair value – carrying value) = €4334700-€1800000-€1400000 = €1134700.
Cr Deferred Income with (sale price – fair value).
On 01-07-2015 Lease Rentals A/c_________Dr. €600000
To Cash A/c ____________________€600000
(Being Lease Rentals Paid as expense)
(B) Entries in books of Anderson plc
On 01-07-2015 Land A/c__________Dr. €2167350
Building A/c_______Dr. €2167350
To Cash A/c _______________€4334700
(Being Land & Building Purchased)
On 01-07-2015 Cash A/c__________Dr. €600000
To Lease Rentals A/c €600000
(Being Lease Rentals as income received)
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