Question

a) On January 1, 2020, Blue Inc. sold computer equipment to Larkspur Co. The sales price of the equipment was $511,000 and its carrying amount is $396,000. Record any journal entries necessary for Blue from the sale of the computer equipment in 2020.

b) Use the information from part a. Assume that, on the same day the sale occurred, Blue enters into an agreement to lease the equipment from Larkspur for 10 years with annual lease payments of $69,428.50 at the end of each year, beginning on December 31, 2020. If Blue has an incremental borrowing rate of 6% and the equipment has an economic useful life of 10 years, record any journal entries necessary for Blue from the sale and leaseback of computer equipment in 2020.

I really just need the answer for the entries for part B) I cannot figure it out, It is so confusing to me

Answer 1

a)

January 1, 2020 When the asset is sold Blue Inc. to Larkspur Co.

Bank A/C Dr $511,000

To Computer Equipment A/C $396,000

To Gain on sale A/C $115,000

b)

But the transaction involved sale and lease back, we should consider proportion of the right retained to use the asset. Whenever sales and leaseback transaction, there will be lease liability and right to use the asset.

Present value of lease amount = $69,428.50 * PVAY(6%, 10 years)

= $69,428.50 * 7.36

= $503,633.76

Proportion of the right retained to use the asset =

=

= 98.56%

Amount of right retained = Carrying amount * Proportion of the right retained to use the asset

= $396,000 * 98.56%

= $390,297.60

So, the journal entry for sale and lease back transaction will be,

Bank A/C Dr $511,000

Right retained of use the asset A/C Dr $390297.60

To Computer Equipment A/C $396,000

To lease liability A/C $503,633.76

To Gain on sale A/C $1,663.84

(Being the asset is sold and taken back as lease from the transferee)

Journal entry every year at the time of lease payment.

Lease liability A/C Dr $ 69,428.50

To Bank A/C $ 69,428.50