Question

To raise operating funds, Signal Aviation sold an airplane on January 1, 2021, to a finance company for $790,000. 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 $820,000. Its cost and its book value were $610,000. Its useful life is estimated to be 14 years. The lease requires Signal to make payments of $105,403 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 10%.

Required:
1.&2. Prepare the appropriate entries for Signal on January 1, 2021 and December 31, 2021, to record the transaction and necessary adjustments. (Round your intermediate and final answers to the nearest whole dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer
Date	Accounts title and Explanation	Debit ($)	Credit ($)
01-01-2021	Cash	$     7,90,000
	Airplanes		$     6,10,000
	Deferred gain on sale - leaseback		$     1,80,000
	( To record deferred gain on sale)
01-01-2021	Leased Airplane	$     7,90,000
	Lease payable		$     7,90,000
	( To record leased airplane)
01-01-2021	Lease payable	$     1,05,403
	Cash		$     1,05,403
	( To record lease payable)
31-01-2021	Interest expense*	$        68,460
	Interest payable		$        68,460
	( To record interest expenses)
31-01-2021	Depreciation expense ($790,000 / 14 years)	$        56,429
	Accumulated depreciation		$        56,429
	( To record accumulated depriciation)
31-01-2021	Deferred gain on sale-leaseback	$        15,000
	Depreciation expense ($180,000/12 years)		$        15,000
	( To record dep on deferred gain on sale)
* Interest expense (10% * [7,90,000 - $1,05,403]) = $68,460

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