To raise operating funds. Signal Aviation sold an airplane on January 1, 2013, t
ID: 2487791 • Letter: T
Question
To raise operating funds. Signal Aviation sold an airplane on January 1, 2013, to a finance company for $910,000 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 $940,000 Its cost and its book value were $690,000. Its useful life is estimated to be 14 years. The lease requires Signal to make payments of $121,413 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 10%. Prepare the appropriate entries for Signal on January 1, 2013, to record the sale leaseback (If no entry is required tor a particular transaction, select "No journal entry required" in the first account field.) Prepare the appropriate entries for Signal on december 31, 2013 to record necessary adjustments. (if no entry is required for a particular transaction, select "No journal entry requited" in the first account field. Enter your answers in whole dollars.)Explanation / Answer
Answer:
Required calculations:
Interest expense = (Fair value - rental payment)*implicit rate
Interest expense = (940000 - 121413)*10%
= 818587*10% = 81858.7 or 81859
Depreciation expense = Fair value of the plane/ No. of years for which the plane has been leased
= 940000/12 = 78333
Deferred gain on sale-leaseback = (Fair value - book value)/No. of years for which the plane has been leased
= (940000 - 690000)/12
= 250000/12 = 20833
Journal entries as on December 31, 2013:
1) Interest Expense Dr. 81859
To interest payable...............81859
2) Depreciation expense Dr. 78333
To accumulated depreciation.....78333
3) Deferred gain on sale-leaseback Dr. 20833
To profit earned on sale-leaseback...............20833
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