Question

E21.24 (LO 5) (Lessee-Lessor, Sale-Leaseback) Respond to the requirements in each situation. Instructions a. On January 1, 2020, Zarle Inc. sold computer equipment to Daniell Co. The sales price of the equipment was $520,000 and its carrying amount is $400,000. Record any Journal entries necessary for Zarle from the sale of the computer equipment in 2020. b. Use the information from part a. Assume that, on the same day the sale occurred, Zarle enters into an agreement to lease the equipment from Daniell for 10 years with annual lease payments of $67,342.42 at the end of each year, beginning on December 31, 2020. If Zarle has an incremental borrowing rate of 5% and the equipment has an economic useful life of 10 years, record any journal entries necessary for Zarle from the sale and leaseback of computer equipment in 2020. c. Use the information from part b. Now, instead of 10 years, the lease term is only 3 years with annual lease payments of $67,342.42 at the beginning of each year. Record any journal entries necessary for Zarle from the sale and leaseback of computer equipment in 2020.

Answer 1

Credit Sol: a.Sale transaction Date Journal Entry 1st Jan 2020 Cash a/c To Computer Equipment To Profit on Sale of Equipment (Being asset sold at profit recognised) Debit 520,000 $ $ $ 400,000 120,000 b. Sale cum Lease back for 10years-It is a case finance Lease-Maximum Useful Life with lessor Present value of annual lease Payments Annual lease Payments (A) $ 67,342.42 Incremental Borrowing rate 5.00% Period of lease 10.00 Annuity factor for 10years @5% (B) 7.72 Present value of annual lease Payments (refer below Note 1 for lease payment Schedul $ 520,000.32

1st Jan 2020 $ 520,000 Lease Eqipment a/c To Lease Liabilitya/c (Being Lease asset recorded) $ 520,000 1st Jan 2020 $ 520,000 $ $ 400,000 120,000 31st Dec 2020 64,136 3,207 67,342 Cash a/c To Computer Equipment a/c To Deferred Gain a/c (Being gain on sale and lease back defferred) Lease Liability a/c Interest on lease payment To Cash a/c (Being Lease payments made) Deferred gain a/c To Gain on sale and lease back (Being gain on sale and lease back defferred recognised over period of 10year) Depreciation a/c To Lease Eqipment a/c (Being depreciation on lease equipment recorded) 31st Dec 2020 $ 12,000 $ 12,000 31st Dec 2020 $ 52,000 $ 52,000

Credit Debit 67,342 $ 67,342 C. Sale cum Lease back for 3years-It is case of operating lease Date Journal Entry 1st Jan 2020 Cash a/c To Computer Equipment To Profit on Sale of Equipment (Being asset sold at profit recognised) 31st Dec 2020 Lease Expense a/c To Cash a/c (Being lease payment recognised as expense) $ $ $ 67,342 $ 67,342

Note1 Lease payment Schedule Present Value Lease payment Closing Year factor annual Pricipal Interest Balance 1 0.952381 $ 67,342.42 $ 64,135.64 $ 3,206.78 $ (455,864.68) 2 0.907029 $ 67,342.42 $ 61,081.56 $ 6,260.86 $ (394,783.12) 3 0.863838 $ 67,342.42 $ 58,172.91 $ 9,169.51 $ (336,610.21) 40.822702 $ 67,342.42 $ 55,402.78 $11,939.64 $(281,207.43) 5 0.7835260 $ 67,342.42 $ 52,764.55 $14,577.87 $(228,442.88) 6 0.746215 $ 67,342.42 $ 50,251.95 $17,090.47 $(178,190.93) 7 0.710681 $ 67,342.42 $ 47,859.00 $ 19,483.42 $(130,331.93) 81 0.676839 $ 67,342.42 $ 45,580.00 $ 21,762.42 $ (84,751.93) 9 0.644609 $ 67,342.42 $ 43,409.52 $23,932.90 $ (41,342.41) 10 0.613913$ 67,342.42 $ 41,342.40 $ 26,000.02 $ (0.00)