To raise operating funds, Signal Aviation sold an airplane on January 1, 2016, t
ID: 2424914 • Letter: T
Question
To raise operating funds, Signal Aviation sold an airplane on January 1, 2016, to a finance company for $1,070,000. Signal immediately leased the plane back for a 12-year period, at which time ownership of the airplane will transfer to Signal. The airplane has a fair value of $1,100,000. Its cost and its book value were $770,000. Its useful life is estimated to be 14 years. The lease requires Signal to make payments of $148,477 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 11%.
Prepare the appropriate entries for Signal on January 1, 2016, to record the sale-leaseback
1/1/16
Record the sale of the airplane.
Record the lease.
Record the cash payment.
12/31/16
Record the depreciation expense..
Record accrued interest.
Record adjustment for the gain.
Explanation / Answer
JANUARY 2016
Record the sale of the airplane.
Cash A/c Dr. $1070000
To Airplane A/c Cr. $770000
To Defferred gain on sale lease back A/c Cr. $30000
Record the lease.
Lease Airplane A/c Dr. $1070000
To Lease Payable A/c Cr. $1070000
Record the cash payment.
Lease payable A/c Dr. $148477
To Cash A/c Cr. $148477
December 31
Record the depreciation expense..
Depreciation Expense A/c Dr. $76429
To Accumulated Depreciation A/c cr. $76429
(1070000 / 12)=> $76429
Record accrued interest.
Interest Expense A/c dr. $101368
To Interest Payable A/c cr. $101368
11% (1070000 - 148477) => $101368
Record adjustment for the gain.
Defferred gain on sale lease back A/c Dr $21429
To Depreciation Expense A/c Cr. $21429
(300000 /14) => $21429
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