In: Accounting
Vendeur Ltd. owns a building in central Montreal. Vendeur enters into an agreement with Bailleur Inc., whereby Vendeur sells the building—but not the land on which it sits—to Bailleur and simultaneously leases it back. The details are as follows: ✓ The original cost of the building was $10,000,000; it is 60% depreciated on Vendeur’s books. ✓ Bailleur agrees to pay Vendeur $8,500,000 for the building, which is the fair value at the time of the sale. ✓ Bailleur agrees to lease the building to Vendeur for 20 years. The annual lease payment is $850,000, payable at the end of each lease year. ✓ There is no guaranteed residual value. ✓ Vendeur will pay all of the building’s operating and maintenance costs, including property taxes and insurance. ✓ The effective date of the agreement is 1 January 20X1. ✓ Vendeur’s incremental borrowing rate is 9%. ✓ Bailleur’s interest rate implicit in the lease is computed after tax and is not disclosed to Vendeur. ✓ Vendeur uses straight-line depreciation for its buildings, with full-year depreciation in the year of acquisition. ✓ Year-end of both companies is December 31 Required: 1. Prepare the journal entry to record the sale by Vendeur to Bailleur on January 1, 20X1.Record the journal entries required by Venduer to record the lease agreement including all the entries for the year 20X1 fiscal period including any entries required as a result of the sale leaseback.
Calculating Present Value of Lease Payments | |||||||||||
Annual Lease Payment = $ 850000 | |||||||||||
PV Annuity Factor @ 9% for 20 Years = 9.1285 | |||||||||||
Present Value of Lease = $ 7759225 (=850000*9.1285) | |||||||||||
Sale is executed at Fair Value so no prepaid lease or Finance Provided | |||||||||||
If Sale is not executed at Fair Value then Diff. Shall be Prepaid lease or Additional Finance | |||||||||||
Carrying Amount of Building in books = $ 40,00,000 (60% Depreciated given) (A) | |||||||||||
Fair Value = $ 85,00,000 (B) | |||||||||||
Discounted Lease Payments = $ 77,59,225 ( C ) | |||||||||||
ROU Asset (A/B*C) | $ 36,51,400.00 | =(4000000/8500000)*7759225 | |||||||||
Seller Lessee recognises only the amount of rights that were transferred to buyer | |||||||||||
Gain (B-A) | $ 45,00,000.00 | ||||||||||
Relating to Right to use building retained by Seller Lesse (Proportion to Discounted Lease Payments) = | $ 41,07,825.00 | ||||||||||
Relating to Rights transferred to Buyer | $ 3,92,175.00 | ||||||||||
On Sale | Bank A/c Dr | $ 85,00,000 | |||||||||
ROU Asset A/c Dr | $ 36,51,400 | ||||||||||
To Building | $ 40,00,000 | ||||||||||
To Finance Lease Liability | $ 77,59,225 | ||||||||||
To Gain on sale | $ 3,92,175 | ||||||||||
Sale and Lease back accounted for | |||||||||||
Year End | |||||||||||
Interest on Lease Liabililty A/c Dr | $ 6,98,330 | ||||||||||
To Finance Lease Liability | $ 6,98,330 | ||||||||||
Interest on Lease Liabililty accounted for | |||||||||||
Finance Lease Liability A/c Dr | $ 8,50,000 | ||||||||||
To Bank | $ 8,50,000 | ||||||||||
Payment of liability | |||||||||||
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