Question

Assume that on January 1, 2021, Windsor Corporation sells equipment to Wildhorse Finance Co. for $1,860,000 and immediately leases back the equipment. The relevant information is as follows.

1.		The equipment was carried on Windsors books at a value of $1,640,000.
2.		The term of the non-cancelable lease is 3 years; title will not transfer to Windsors, and the expected residual value at the end of the lease is 1,230,000, all of which is unguaranteed.
3.		The lease agreement requires equal rental payments of $303,545 at the beginning of each year.
4.		The incremental borrowing rate for Windsor is 7%. Windsor is aware that Wildhorse Finance set the annual rental to ensure a rate of return of 7%.
5.		The equipment has a fair value of $1,860,000 on January 1, 2021, and an estimated economic life of 10 years.

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Prepare the journal entries for both the lessee and the lessor for 2021 to reflect the sale and leaseback agreement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
Windsor Corporation (Seller-Lessee)
1/1/2112/31/21
	(To record sale)
1/1/2112/31/21
	(To record lease)
1/1/2112/31/21
	(To record first lease payment)
1/1/2112/31/21

Date	Account Titles and Explanation	Debit	Credit
Wildhorse Corporation (Buyer-Lessor)
1/1/2112/31/21
	(To record purchase)
1/1/2112/31/21
	(To record lease payments)
1/1/2112/31/21
	(To record lease revenue)
1/1/2112/31/21
	(To record depreciation)

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Answer 1

Answer:

Windsor Corporation
Lessee
Journal Entries

Date	Particulars	Debit ($)	Credit ($)
1/1/2021	Cash	1,860,000
	Equipment		1,640,000
	Unearned profit on sale - Lease back		220,000
	(To record Book Value)
	Leased Equipment	852,355
	Lease Liability		852,355
	(To record equipment leased)
	(PVIFA 3yrs, 7%)*115490=2.8080*303545
31/12/2021	Unearned profit on sale - Lease back	22,000
	Depreciation Expense (220000/10)		22,000
	(To record Depreciation)
31/12/2021	Depreciation Expense (1860000/10)	186,000
	Accumulated Capital Leases		186,000
	(To charge depreciation to asset)
	Interest Expense	117,545,
	Lease Liability	186,000
	Cash		303,545
	(To record Lease liability paid)

Wildhorse Corporation
Lessor
Journal Entries

Date	Particulars	Debit ($)	Credit ($)
1/1/2021	Equipment	1,860,000
	Cash		1,860,000
	(To record equipment purchased for cash)
	Lease receivable	1,860,000
	Equipment		1,860,000
	(To record Equipment leased)
31/12/2021	Cash	303,545
	Lease Receivable		186,000
	Inerest Revenue		117,545
	(To reord Lease receivable received)