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 3 years, there is no bargain purchase option, and title does not transfer to Irwin at lease-end. The lease requires three equal rental payments of $8,696 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, and the residual value at the end of the lease term is expected to be $14,000, none of which is guaranteed. Prepare Irwin’s 2017 journal entries.

Answer 1

Journal entries in the books of Irwin Animation for the year 2017 is shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2017	Cash	35,000
	Truck		28,000
	Unearned Profit on Sale-Leaseback (35,000-28,000)		7,000
	(To record the sale of truck)
Jan 1, 2017	Right of Use Asset	35,000
	Lease Payable		35,000
	(To record the leaseback)
Dec 31, 2017	Depreciation Expense [($35,000-$14,000)/3]	7,000
	Right of Use Asset		7,000
	(To record depreciation)
Dec 31, 2017	Unearned Profit on Sale-Leaseback ($7,000/3)	2,333
	Depreciation Expense		2,333
	(To write off unearned profit on sale and leaseback)
Jan 1, 2018	Interest Expense ($35,000*6%)	2,100
	Lease Payable ($8,696-$2,100)	6,596
	Cash		8,696
	(To record the first lease payment)