Question

To raise operating funds, North American Courier Corporation sold its building on January 1, 2021, to an insurance company for $540,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2030, at which time ownership of the building will revert to North American Courier. The building has a carrying amount of $480,000 (original cost $1,160,000). The lease requires North American to make payments of $87,882 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
  
Required:
1. Prepare the appropriate entries for North American (a) on January 1, 2021, to record the transaction and (b) on December 31, 2021, to record necessary adjustments.
2. Show how North American’s December 31, 2021, balance sheet and income statement would reflect the sale-leaseback.

Answer 1

Answer:

1.)
Present value of periodic lease payments ($87882 x 6.1446**) =$540,000
Present value of an ordinary annuity of $1: n=10 , i=10%

Cash	540,000
Accumulated depreciation (cost-carrying amount)	680,000
Building (original cost)		1,160,000
Deferred gain on sale - leaseback (difference)		60,000
Leased building (present value of lease payments)	540,000
Lease payable (present value of lease payments)		540,000

Note: Because the title transfers to the lessee this is a capital lease.

December 31 2021	Interest expense (10% x $540,000	54,000
	Lease payable (difference)	33,882
	Cash (lease payment)		87,882
	Depreciation expense ($540,000/ 12 years*)	45,000
	Accumulated depreciation		45,000
	Deferred gain on sale-leaseback ($60000 / 12 years*)	5,000
	Depreciation expense		5,000

Total life x carrying amount / cost = 30 years x $480,000 / $1160000 = 12 years

2.

Balance Sheet
Assets:
leased asset	$540,000
Less: accumulated depreciation	(45,000)
less: deferred gain (60,000 - 5000)	(55,000)
	$440,000
Liabilities:
Current:
Lease payable ($87882 - (10% x ($540,000-33,882)))	$37,270
Non current:
Lease payable ($540,000-33,882-37,270)	$468,848

Income Statement
Interest expense	$54,000
Depreciation expense ($45000-5000)	40,000
	$94,000

Portion of Amortization Schedule - not required but verifies several amounts:

Lease Amortization Schedule
Date	payments	Effective Interest	Decrease in Balance		Outstanding Balance
		(10% x outstanding Balance)
1/1/13					540000
12/31/13	87882	0.10(540000)	54,000	33882	506,118
12/31/14	87882	0.10(506118)	50,612	37270	468,848