Question

To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2021, for $890,000 and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 20-year remaining useful life. The building has a fair value of $890,000 and a book value of $695,000 (its original cost was $1 million). The rental payments of $190,000 are payable to the insurance company each December 31. The lease has an implicit rate of 7%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: 1. & 2. Prepare the appropriate entries for National Distribution Center on January 1, 2021 and December 31, 2021, to record the sale- leaseback and necessary adjustments. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1-Jan-21

Dr Cash $890,000

Dr Accumulated Depreciation $305,000

Cr Building $1,000,000

Gain On Sale of Building $195,000

1-Jan-21

Dr Right Of Use Assets $1,508,600

Cr Lease Payable $1,508,600

31-Dec-21

Dr Interest Expense $105,602

Dr Lease Payment $84,398

Cr Cash $190,000

31-Dec-21

Dr Amortization Expenses $84,398

Right Of Use Assets $84,398

Step-by-step explanation:

1. & 2. Preparation for the appropriate entries for National Distribution Center on January 1, 2021 and December 31, 2021, to record the sale- leaseback and necessary adjustments

1-Jan-21

Dr Cash $890,000

Dr Accumulated Depreciation $305,000 ($1,000,000-$695,000)

Cr Building $1,000,000

Gain On Sale of Building $195,000

($890,000+$305,000-$1,000,000)

(To Record Lease)

1-Jan-21

Dr Right Of Use Assets ( $190,000* PVAF 7% for 12year)

($190,000*7.94) $1,508,600

Cr Lease Payable $1,508,600

(To Record The Lease Payable)

31-Dec-21

Dr Interest Expense ($1,508,600*7%) $105,602

Dr Lease Payment $84,398

($190,000-$105,602)

Cr Cash $190,000

(To Record First Lease payment)

31-Dec-21

Dr Amortization Expenses $84,398

Right Of Use Assets $84,398

(To Record Amortisation Expense)