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

Question

To raise operating funds, North American Courler Corporation sold its building on January 1,2018. to an insurance company for $700,000 and lmmediately leased the building back. The lease is for a 10-year perlod ending December 31,2024, at which time ownership of the building will revert to North American Courler. The building has a carrying amount of $530,000 (original cost 1,260,000). The lease requires North American to make payments of $118,862 to the insurance company each December 31. The bullding 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 rte of 11%. CA. ot$1. PyofS1. EVAof $1, PVAoSI, EVAD of$1 and PVADots) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the appropriate entries for North American on (o) January 1, 2018, to record the transaction and (b) December 31, 2018, to record necessary adjustments 2. Show how North American's December 31, 2018, balance sheet and income statement would reflect the sale-leaseback. Complete this question by entering your answers in the tabs below. Required 1Required 2 Prepare the appropriate entries for North American on (a) January 1, 2018, to record the transaction and (b) December 31, 2018, to record necessary adjustments. (If no entry is required for a transaction/event, select "No journal entry required" In the first account field. Round your intermediate and final answers to nearest whole dollar) View transaction list Journal entry worksheet Record the sale-leaseback

Explanation / Answer

1) Date General Journal Debit Credit January 01, 2018 Cash $700,000.00 Accumulated depreciation ($1,260,000 - $530,000) $730,000.00                  Buildings $1,260,000.00                  Deferred gain on sale­leaseback $170,000.00 Present value of periodic rental payments ($118,862 x 5.88923**) $700,005.90 * * rounded ** present value of an ordinary annuity of $1: n=10, i=11% 5.88923 January 01, 2018 Leased Building $700,000.00                Leased Payable $700,000.00 December 31,2018 Interest expense ( 700,000 x 11%) $77,000.00 Lease payable $41,862.00            Cash $118,862.00 December 31,2018 Depreciation expense (($700,000 ÷ 12.62 years*) $55,471.70                 Accumulated depreciation $55,471.70 December 31,2018 Deferred gain on sale­leaseback $13,471.70                        Depreciation expense $13,471.70 $170,000/12.62 yrs * # of years remaining for useful life of Building Annual depreciation = $1260000/30 $42,000.00 # of years Building has Depreciated = $730,000/$42000 17.38 years Years Remaining = 30 - 17.38 12.62 years 2. Show how North American’s December 31, 2018, balance sheet and income statement would reflect thes ale­leaseback Balance Sheet Asset Leased Asset $700,000.00 Less: Accumulated depreciation -$55,471.70 Less: Deferred gain ($170,000 - $13471.70) -$156,528.30 $488,000.00 Liabilities Current: Lease payable ($118,862 – {11% x [$700,000 – 41862]}) $46,466.82 Non Current Lease payable ($700,000 - 41862-46466.82) $611,671.18 Income Statement Interest Expense $77,000.00 Depreciation expense $42,000.00 $119,000.00

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