Question

To raise operating funds, National Distribution Center sold its office building to an insurance company on January 1, 2018, for $800,000 and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 20-year remaining useful life. The building has a fair value of $800,000 and a book value of $650,000 (its original cost was $1 million). The rental payments of $100,000 are payable to the insurance company each December 31. The lease has an implicit rate of 9%.
Prepare the appropriate entries for National Distribution Center on:
1. January 1, 2019, to record the sale-leaseback
2. December 31, 2018, to record necessary adjustments

Answer 1

Answer:

Equipment 716,072.53 debit

  Lease payable   716,072.53 credit

interest expense 64,446.53 debit

   lease payable      64,446.53 credit

Explanation:

We record the lease payment present value:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 100,000.00

time 12

rate 0.09

$100000 \times \frac{1-(1+0.09)^{-12} }{0.09} = PV$

PV $716,072.5277

Now we solve for the interest accrued during the year

716,072.53 x 0.09 = 64.446,53