Question

On 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 start on January 1, 2018. Hester uses straight-line depreciation and there is no residual value. Required: Prepare all of Hester’s entries for 2018.

Answer 1

Hester Co. (Lessee)

Date	General Journal	Debit	Credit
January 1, 2018	Cash	$960,000
	Machinery		$840,000
	Unearned Profit on Sale-Leaseback		$120,000
January 1, 2018	Leased Machinery	$960,000
	Lease Liability		$960,000
January 1, 2018	Lease Liability	$142,000
	Cash		$142,000
December 31, 2018	Depreciation Expense	$96,000
	Accumulated Depreciation—Capital Lease		$96,000
December 31, 2018	Unearned Profit on Sale-Leaseback	$12,000
	Depreciation Expense		$12,000
December 31, 2018	Interest Expense [10% × ($960,000 – $142,000)]	$81,800
	Interest Payable		$81,800