Answer:
North American Courier Corporation
1. Appropriate Entries:
Jan. 1, 2021:
Debit Cash Account $503,000
Credit Building $500,000
Credit Gain on Sale-Leaseback $3,000
To derecognize the asset and recognize the gain on the sale-leaseback.
Dec. 31, 2021:
Debit Lease Rental $89,023
Credit Cash Account $89,023
To account for the lease rental for the year.
Note: This treatment is in accordance with ASC 842 and not IFRS 16, which has withdrawn the concepts of operating and finance (capital) leases. The treatment under IFRS 16 is quite different.
Explanation:
A transaction qualifies for sale and leaseback accounting under ASC 840 when an entity has determined if the transfer of the underlying asset meets the definition of a sale under ASC 606 Revenue from Contracts with Customers. The two key criteria which can be used by an entity to determine this, are as follows:
1. Does a contract exists; and
2. Has control of the asset been transferred?
We believe that the criteria are met. Since this transaction qualifies for sale and leaseback accounting under the old ASC 840, the accounting for the Seller-lessee (North American Courier Corporation) is:
1. Recognize transaction price (determined under ASC 606) when buyer-lessor obtains control, adjusted for any off-market terms
2. Derecognize the carrying amount of the underlying asset
3. Recognize gain or loss in full, subject to any off-market terms
4. Account for the (operating) lease in accordance with ASC 840.
