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Chapter 21: Q12BE (page 1240)

On January 1, 2017, Irwin Animation sold a truck to Peete Finance for \(33,000 and immediately leased it back. The truck was carried on Irwin’s books at \)28,000. The term of the lease is 5 years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of $8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a useful life of 5 years with no salvage value. Prepare Irwin’s 2017 journal entries.

Short Answer

Expert verified

Leased equipment is $33,000

Accumulated depreciation is $6,600

Depreciation expense is $1,000

Step by step solution

01

Meaning of Leaseback

The term leaseback is an agreement in which a firm sells the asset while obtaining a long-term lease from the buyer for the continued use of the deeded asset. It is a process that involves selling an item and then leasing a portion of that assetback to the seller for future use.

02

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Cash

33,000

Trucks

28,000

Unearned Profit on Sales

Leaseback

5,000

Leased Equipment

33,000

Lease Liability

33,000

Working Notes:-

Calculation of Leased Equipment

Leasedequipment=Rentalpayments×Presentvalueofannuity=$8,705×3.79079=$33,000

Note:$1 difference due to rounding

Present value of an annuity due of 1 for 5 periods at 10%

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

6,600

Accumulated Depreciation

Capital Leases

6,600

Unearned Profit on Sale

Leaseback

1,000

Depreciation Expense

1,000

Interest Expense

3,300

Lease Liability

5,405

Cash

8,705

Working Notes:-

Calculation of Accumulated depreciation

Accumulateddepreciation =EquipmentvalueUsefullife=$33,0005=$6,600

Calculation of Depreciation expense

Depreciationexpense =UnearnedprofitonsalesUsefullife=$5,0005=$1,000

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Most popular questions from this chapter

What disclosures should be made by lessees and lessors related to future lease payments?

(Accounting for an Operating Lease) On January 1, 2017, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows.

  1. The lease arrangement is for 10 years.
  2. The leased building cost \(4,500,000 and was purchased for cash on January 1, 2017.
  3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value.
  4. Lease payments are \)275,000 per year and are made at the end of the year.
  5. Property tax expense of \(85,000 and insurance expense of \)10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year.
  6. 6. Both the lessor and the lessee are on a calendar-year basis.

Instructions

  1. Prepare the journal entries that Nelson Co. should make in 2017.

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2017, and requires annual rental payments of \(413,971 each January 1, starting January 1, 2017.

Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is \)2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Instructions

(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2017.

(Lessee Accounting and Reporting) On January 1, 2017, Evans Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Evans by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Evans on January 1, 2017, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.

Instructions

(c) What expenses related to this lease will Evans incur during the first year of the lease, and how will they be determined?

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of \(40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of \)20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones’ January 1, 2017, journal entries assuming an interest rate of 10%.
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