Question

To raise operating funds, North American Courier Corporation sold its building on January 1, 2021, to an insurance company for $503,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2030, at which time ownership of the building will revert to North American Courier. The building has a carrying amount of $500,000 (original cost $1,200,000). The lease requires North American to make payments of $89,023 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 12%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the appropriate entries for North American (a) on January 1, 2021, to record the transaction and (b) on December 31, 2021, to record necessary adjustments. 2. Show how North American’s December 31, 2021, balance sheet and income statement would reflect the sale-leaseback.

Answer 1

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Note: This treatment is in accordance with ASC 842 and not IFRS 16, which has withdrawn the concepts of operating and finance (capital) leases.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.

Answer 2

The journal entries of the above transactions are given in the image below.

What are the journal Entries?

Each journal entry comprises the data important to an individual business transaction, including the date, the amount to be credited and debited, a short statement of the transaction and the accounts changed.

It is the systematic record of the accounting transactions and shows the short summary of all the transactions.

Note:

This attention is in agreement with ASC 842 and not IFRS 16, which has to draw back the conceptions of operating and finance leases.  The attention under IFRS 16 is rather assorted.

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 is:

1. Realise transaction price when buyer-lessor acquires control, correct for any off-market terms.

2. Derecognise the transporting amount of the underlying asset.

3. Recognize increase or decrease in full, subject to any off-market footings.

4. Account for the rental in agreement with ASC 840.

Therefore, the journal entries of the above transactions are given in the image below.

Learn more about the journal entries, refer to:

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