In: Accounting
Central Purchasing Ltd. (CPL) owns the building it uses; it had
an original cost of $8,192,000 and accumulated depreciation of
$2,457,600 as of 1 January 20X2. On this date, the building (but
not the land) was sold to a real estate investment trust (REIT) for
$7,692,000, which also was the building’s fair value, and
simultaneously leased back to CPL.
The lease has a 15-year term and required payments on 31 December
of each year. The payments are $662,000 with no transfer of title
or purchase option. CPL will pay all of the building’s operating
and maintenance costs including property taxes and insurance. CPL’s
incremental borrowing rate is 9%. The building is being depreciated
straight-line with a full year’s depreciation in the year of
acquisition.
1. Prepare entries for CPL to record the sale and leaseback of the building.
2. Prepare year-end adjusting entries for 20X2.
3a. Show how all amounts related to the sale and leaseback will be presented on the statement of financial position in 20X2.
3b. Show how all amounts related to the sale and leaseback will be presented on the statement of comprehensive income in 20X2.
This question is solved using the IFRS.
Year | PV factor @ 9% | Remarks |
1 | 0.91743 | = 1 / 1.09 |
2 | 0.84168 | = 0.91743 / 1.09 |
3 | 0.77218 | = 0.84168 / 1.09 |
4 | 0.70843 | = 0.77218 / 1.09 |
5 | 0.64993 | = 0.70843 / 1.09 |
6 | 0.59627 | = 0.64993 / 1.09 |
7 | 0.54703 | = 0.59627 / 1.09 |
8 | 0.50187 | = 0.54703 / 1.09 |
9 | 0.46043 | = 0.50187 / 1.09 |
10 | 0.42241 | = 0.46043 / 1.09 |
11 | 0.38753 | = 0.42241 / 1.09 |
12 | 0.35553 | = 0.38753 / 1.09 |
13 | 0.32618 | = 0.35553 / 1.09 |
14 | 0.29925 | = 0.32618 / 1.09 |
15 | 0.27454 | = 0.29925 / 1.09 |
Total | 8.06069 |
Part 1
Sold value | 7,692,000 | ||
Less: Book value (8192000-2457600) | 5,734,400 | ||
Gain on sale of building | 1,957,600 |
Date | Accounts titles and explanation | Debit | Credit | |
Jan 1, 20X2 | Cash | 7,692,000 | ||
Accumulated depreciation | 2,457,600 | |||
Building | 8,192,000 | |||
Gain on sale of building | 1,957,600 | |||
(To record sale of assets) | ||||
Jan 1, 20X2 | Right of use Asset | 5,336,177 | ||
Lease liability | 5,336,177 | |||
(To record the lease) (662000*8.06069) |
Part 2
Date | Accounts titles and explanation | Debit | Credit | |
Dec 31, 20X2 | Interest expense (5336177*9%) | 480,256 | ||
Lease liability (662000-480256) | 181,744 | |||
Cash | 662,000 | |||
(To record lease payment.) | ||||
Dec 31, 20X2 | Amortization Expense (5336177/15) | 355,745 | ||
Right of use Asset | 355,745 | |||
(To record amortization under operating lease.) (Using IFRS) |
Part 3a
Statement of financial position | ||
Assets | ||
Right of use Asset = 5336177-355745 | 4,980,432 | |
Liabilities | ||
Lease liability = 5336177-181744 | 5,154,433 |
Part 3b
Statement of comprehensive income | ||
Expenses:- | ||
Interest expense (5336177*9%) | 480,256 | |
Amortization Expense (5336177/15) | 355,745 |