On January 1, 2017, Irwin Animation sold a truck to Peete Finance for $35,000 an

Question

On January 1, 2017, Irwin Animation sold a truck to Peete Finance for $35,000 and immediately leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Irwin at lease-end. The lease requires 5 equal rental payments of $8,309 at the end of each year (first payment on January 1, 2018). The appropriate rate of interest is 6%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term. Prepare Irwin’s 2017 journal entries assuming these new facts. Must use factor table.

Explanation / Answer

SOLUTION

Date Account titles and Explanation Debit ($) Credit ($) Jan.1 Cash 35,000 Truck 28,000 Unearned Profit on Sale-Leaseback 7,000 (To record the sale) Jan.1 Leased Equipment 35,000 Lease Liability 35,000 (To record the leaseback) Dec.31 Depreciation Expense ($35,000/5 years) 7,000 Accumulated Depreciation 7,000 (To record depreciation) Dec.31 Unearned Profit on Sale-Leaseback 1,400 Depreciation Expense ($7,000/5 years) 1,400 Dec.31 Lease Liability 6,209 Interest Expense ($35,000*6%) 2,100 Cash 8,309 (To record first lease payment)

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