Question

On January 1, 2020, Tom Co (A seller-lessee) sells a building to MacCo (an unrelated buyer lessor) for cash of CU2,000,000. The fair value of the building at that time is CU1,800,000; the carrying amount immediately before the transaction is CU1,000,000. At the same time, TomCo enters into a contract with MacCo for the right to use the building for 19 years, with annual payments of CU120,000 payable at the end of each year. The interest rate implicit in the lease is 4.5%, which results in a present value of the annual payments of CU1,459,200. The transfer of the asset to MacCo has been assessed as meeting the definition of a sale under PSAK 72.
Discuss the implication of the transactions and state the journal entries on January 1, 2020

Answer 1

For financial transaction: Cash will be debited and financial liability will be credited

For sale and leaseback: Cash and right to use assets will be debited and building, financial liability and gain will be credited.

Explanation:

As the financing transaction of building exceeds the consideration of fair value CU200,000 i.e.(2,000,000 - 1,800,000).

Therefore, following journal entry will be passed:

Cash a/c CU200,000

         To financial liability a/c CU200,000

(Being the financial transaction of building has been recorded)

The Tom company recently recognises the right of use asset as proportion of CU 1,000,000 i.e. carrying amount. The proportion will be calculated as follows:

Proportion of right to use = ((PV of annual payments - repayments of financing) / FV of asset) * Carrying amount

                                         = ((CU1,459,200 - CU200,000) / CU1,800,000) * CU1,000,000

                                         = CU699,555

Gain on sale = (FV of asset - Right of use of asset) / FV of asset * Total gain

                     = (CU1,800,000 - CU1,259,200)/CU1,800,000* CU800,000

                     = CU 240,355

Total gain = FV of asset - Carrying amount

                = CU1,800,000 - CU1,000,000

                 = CU800,000

Following journal entry will be passed:

Cash a/c CU1,800,000

Right to use asset a/c CU699,555

             To building a/c CU1,000,000

              To financial liability a/c CU1,259,200

              To gain a/c CU 240,355

(Being sale and leaseback recorded)