Question

In: Accounting

Central Purchasing Ltd. (CPL) owns the building it uses; it had an original cost of $8,192,000...

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.

Solutions

Expert Solution

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

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