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

Question

To raise operating funds, North American Courier Corporation sold its building on January 1, 2018, to an insurance company for $439,600 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2024, at which time ownership of the building will revert to North American Courier. The building has a carrying amount of $410,000 (original cost $1,020,000). The lease requires North American to make payments of $74,637 to the insurance company each December 31. The building 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 rate of 11%.

Required:
1. Prepare the appropriate entries for North American on (a) January 1, 2018, to record the sale-leaseback (b) December 31, 2018, to record cash payment (c) December 31, 2018, to record depreicatione expense.
2. Show how North American’s December 31, 2018, balance sheet and income statement would reflect the sale-leaseback.  

Explanation / Answer

Journal Entries Date Accoutn Tittle & Explanation Debit Credit Jan-01 Cash 439600 Accumulated Depreciation ($1020000-$410000) 610000 Building 1020000 Deferred Gain on Sale - Lease Back 29600 To Record the sale of Building 01-Jan Lease Building ( 74637*5.889232) 439600 Lease Payable 439600 To Record the lease Asset and Liability Dec-31 Interest Expnese (439600*11%) 48356 Lease Payable 26281 Cash 74637 To Record the payment of Installment Dec-31 Depreciation Expense ($439600/12**) 36633 Accumulated Depreciation 36633 To Record the Depreciation Expense Dec-31 Deferred Gain on Sale- Leaseback (29600/12**) 2467 Depreciation Expense 2467 To Record the Amortization of deferred gain on Sale - lease back 12 Year= 30 year - (610000/(1020000/30)) Inccome Statement - Partiall Particular Amount Interest Expense 48356 Depreciation Expense (36633-2467) 34166 Balance Sheet- Partial Liabilities Lease Payable ($439600-26281) 413319 Asset Lease Building 439600 Less: Accumulated Depreciation 36633 Less: Deferred Gain ( $29600-2467) 27133 375834

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