To raise operating funds, Signal Aviation sold an airplane on January 1, 2018, t

Question

To raise operating funds, Signal Aviation sold an airplane on January 1, 2018, to a finance company for $910,000. Signal immediately leased the plane back for a 12-year period, at which time ownership of the airplane will transfer to Signal. The airplane has a fair value of $940,000. Its cost and its book value were $670,000. Its useful life is estimated to be 14 years. The lease requires Signal to make payments of $121,413 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 10%.

Required:
1.&2. Prepare the appropriate entries for Signal on January 1, 2018 and December 31, 2018, to record the transaction and necessary adjustments.

1) Jan 01 2018- Record the cash received on sale by Signal Aviation.

2) Jan 01 2018 - Record the beginning of the lease by Signal Aviation.

3) Dec 31 2018 - Record accrued interest.

4) Dec 31 2018 Record the depreciation expense.

Explanation / Answer

SOLUTION

* Interest expense (10% * [$910,000 - $121,413]) = $78,859

Date Accounts title and Explanation Debit ($) Credit ($) Jan 01 2018 Cash 910,000 Airplanes 670,000 Deferred gain on sale - leaseback 240,000 Jan 01 2018 Leased airplane 910,000 Lease payable 910,000 Jan 01 2018 Lease payable 121,413 Cash 121,413 Dec.31 2018 Interest expense* 78,859 Interest payable 78,859 Dec.31 2018 Depreciation expense ($910,000 / 14 years) 65,000 Accumulated depreciation 65,000 Dec.31 2018 Deferred gain on sale-leaseback 20,000 Depreciation expense ($240,000/12years) 20,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.