On January 1, 2017, Sandhill Animation sold a truck to Peete Finance for $38,000

Question

On January 1, 2017, Sandhill Animation sold a truck to Peete Finance for $38,000 and immediately leased it back. The truck was carried on Sandhill’s books at $32,550. The term of the lease is 5 years, and title transfers to Sandhill at lease-end. The lease requires 5 equal rental payments of $9,770 at the end of each year. The appropriate rate of interest is 9%, and the truck has a useful life of 5 years with no salvage value.

Prepare Sandhill’s 2017 journal entries. To record amortization of profit on sale use Depreciation Expense account and not Sales Revenue account.

Account Titles and Explanation Debit Credit Cash 38000 Trucks 32550 Unearned Profit on Sale-Leaseback 5450 (To record the sale.) Leased Equipment Lease Liability (To record the leaseback.) Depreciation Expense 9770 Accumulated Depreciation-Capital Leases 9770 (To record depreciation.) Unearned Profit on Sale-Leaseback Depreciation Expense (To record amortization of profit on sale.)

Explanation / Answer

Account Titles and Explanation

Debit

Credit

Cash

$38000

     Trucks

$32550

      Unearned profit on sale-leaseback

$5450

(To record sale of truck)

Leased Equipment

$38000

      Lease Liability

$38000

(To record the leaseback)

Depreciation expense ($38000 / 5)

$7600

     Accumulated depreciation – Capital Lease

$7600

(To record depreciation)

Unearned profit on sale-leaseback ($5450 / 5)

$1090

      Depreciation Expense

$1090

(To record amortization of profit on sale)

Interest Expense ($38000 * 0.09)

$3420

Lease Liability ($9770 – $3420)

$6350

      Cash

$9770

(To record first lease payment)

Account Titles and Explanation

Debit

Credit

Cash

$38000

     Trucks

$32550

      Unearned profit on sale-leaseback

$5450

(To record sale of truck)

Leased Equipment

$38000

      Lease Liability

$38000

(To record the leaseback)

Depreciation expense ($38000 / 5)

$7600

     Accumulated depreciation – Capital Lease

$7600

(To record depreciation)

Unearned profit on sale-leaseback ($5450 / 5)

$1090

      Depreciation Expense

$1090

(To record amortization of profit on sale)

Interest Expense ($38000 * 0.09)

$3420

Lease Liability ($9770 – $3420)

$6350

      Cash

$9770

(To record first lease payment)

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