Question

On January 1, 2017, Irwin Animation sold a truck to Peete Finance for $35,000 and immediately leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Irwin at lease-end. The lease requires 5 equal rental payments of $8,309 at the end of each year (first payment on January 1, 2018). The appropriate rate of interest is 6%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term. Prepare Irwin’s 2017 journal entries assuming these new facts. Must use factor table.

Answer 1

SOLUTION

Date	Account titles and Explanation	Debit ($)	Credit ($)
Jan.1	Cash	35,000
	Truck		28,000
	Unearned Profit on Sale-Leaseback		7,000
	(To record the sale)
Jan.1	Leased Equipment	35,000
	Lease Liability		35,000
	(To record the leaseback)
Dec.31	Depreciation Expense ($35,000/5 years)	7,000
	Accumulated Depreciation		7,000
	(To record depreciation)
Dec.31	Unearned Profit on Sale-Leaseback	1,400
	Depreciation Expense ($7,000/5 years)		1,400
Dec.31	Lease Liability	6,209
	Interest Expense ($35,000*6%)	2,100
	Cash		8,309
	(To record first lease payment)