In January 1, 2018, Hester Co. sells machinery to Beck Corp. at its fair value of $960,000
Question:
In January 1, 2018, Hester Co. sells machinery to Beck Corp. at its fair value of $960,000 and leases it back. The machinery had a carrying value of $840,000, the lease is for 10 years and the implicit rate is 10%. The lease payments of $142,000 starting on January 1, 2018. Hester uses straight-line depreciation and there is no residual value.
Hesters Co journal entry is presented below
Hester Co. (Lessee) January 1, 2018
Cash A/C Dr 960,000
To Equipment 840,000
To Unearned Profit on Sale-Leaseback 120,000
Leased Equipment A/C Dr 960,000
To Lease Liability 960,000
Lease Liability A/C Dr 142,000
To Cash 142,000
December 31, 2018
Depreciation Expense A/C Dr 96,000
To Accumulated Depreciation—Leased Equipment 96,000
Unearned Profit on Sale-Leaseback A/C Dr 12,000
To Depreciation Expense 12,000
Interest Expense A/C Dr [10% × ($960,000 – $142,000)] 81,800
To Interest Payable 81,800
Instructions Prepare all of Becks entries for 2018.
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker