On January 1, 2017, Tejas Distributiors sold a warehouse to Jamble Leasing for $
ID: 2398028 • Letter: O
Question
On January 1, 2017, Tejas Distributiors sold a warehouse to Jamble Leasing for $650,000 and immediately leased it back. The warehouse was carried on Tejas’ books at $311,000. The term of the lease is 5 years. The lease contains no renewal or purchase options. The warehouse reverts to Jamble at the termination of the lease. The lease requires 5 equal rental payments of 66,204 at the end of each year. The appropriate rate of interest is 8%, and the warehouse has a useful life of 20 years with no salvage value. Prepare Tejas’ 2017 journal entries.
Explanation / Answer
No. Journal entry Debit credit
1. Cash A/c 6,50,000
To Buildings A/C. 3,11,000
To unearned profit on sale lease back . 3,39,000
2. Leased equipment A/C. 2,64,333
To lease liability . ($66,204*3.9927). 2,64,333
3. Depreciation expense A/c 32,500
To accumulated depreciation.($650000/20). 32,500
4. Unearned profit on sale lease back A/c. 16,950
To depreciation expense . 16,950
5. Interest expense ($6,50,000*8%) 52,000
Lease liability 14,204
To cash 66,204
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