Question

To raise operating funds, Signal Aviation sold an airplane on January 1, 2018, to a finance company for $830,000. Signal immediately leased the plane back for a 12-year period, at which time ownership of the airplane will transfer to Signal. The airplane has a fair value of $860,000. Its cost and its book value were $630,000. Its useful life is estimated to be 14 years. The lease requires Signal to make payments of $110,740 to the finance company each January 1. Signal depreciates assets on a straight-line basis. The lease has an implicit rate of 10%. Required: 1.&2. Prepare the appropriate entries for Signal on January 1, 2018 and December 31, 2018, to record the transaction and necessary adjustments

Answer 1

Date	journal	Debit	credit
January 01,2018	cash	830,000
	Airplanes		630,000
	Deferred gain on sale-lease back		2,00,000
January 01,2018	Leased airplane	830,000
	Lease payable		830,000
January 01,2018	Lease payable	110,740
	Cash		110,740
December 31,2018	Interest expense	71,926
	Interest payable		71,926
	(10% [830,000- 110,740])
December 31,2018	Depreciation expenses	59,286
	Accumulated depreciation		59,286
	(830,000 ÷ 14)
December 31,2018	Deferred gain on sale- lease back	16,667
	Depreciation expenses		16,667
	(2,00,000 ÷ 12)