Lessee and lessor accounting (sale-leaseback). On January 1, 2013, Morris Compan
ID: 2388029 • Letter: L
Question
Lessee and lessor accounting (sale-leaseback).On January 1, 2013, Morris Company sells land to Lopez Corporation for $8,000,000, and immediately leases the land back. The following information relates to this transaction:
1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.
2. The land has a cost basis of $6,720,000 to Morris.
3. The lease agreement calls for equal rental payments of $814,816 at the end of each year.
4. The land has a fair value of $8,000,000 on January 1, 2013.
5. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%.
6. Morris Company pays all executory costs which total $255,000 in 2013.
7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions
(a) Prepare the journal entries for the entire year 2013 on the books of Morris Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)
(b) Prepare the journal entries for the entire year 2013 on the books of Lopez Corporation to reflect the above purchase and lease transactions.
Explanation / Answer
Cash .................................... 8,000,000
Land .................................. 6,720,000
Unearned Profit on Sale-Leaseback ..... 1,280,000
Leased Land Under Capital Leases ........ 8,000,000
Lease Liability ....................... 8,000,000
Throughout 2013
Executory Costs (Insurance and Taxes) ... 340,000
Accounts Payable and Cash ............. 340,000
December 31, 2013
Unearned Profit on Sale-Leaseback ....... 64,000
Revenue from Sale-Leaseback
($1,280,000 20) .................... 64,000
Interest Expense ........................ 640,000
Lease Liability ......................... 174,816
Cash .................................. 814,816
Partial Lease Amortization Schedule
Annual Reduction
Lease Interest of Lease
Date Payment 8% Liability Balance
1/1/04 $8,000,000
12/31/04 $814,816 $640,000 $174,816 7,825,184
==================
(b) Stone Corporation (Lessor)
January 1, 2013
Land ................................... 8,000,000
Cash ................................. 8,000,000
Lease Receivable ....................... 8,000,000
Land ................................. 8,000,000
December 31, 2013
Cash ................................... 814,816
Lease Receivable ..................... 174,816
Interest Revenue ..................... 640,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.