Question

The following are four independent situations.

(c) On January 1, 2017, McKane Corp. sold an airplane with an estimated useful life of 10 years. At the same time, McKane leased back the plane for 10 years. The sales price of the airplane was \(500,000, the carrying amount \)379,000, and the annual rental $73,975.22. McKane Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. Discuss how the gain on the sale should be reported at the end of 2017 in the financial statements.

Short answer

Profit for the year is $22,000.

Step-by-step solution

Meaning of Depreciation

Depreciation is a decrease in the price of a physical commoditythat affects the monetary value of an asset due to a number of factors, such as wear and tear from extended use. The depreciation amount can be ascertained using the straight-line method and the diminishing balance method.

Explaining the gain on the sale should be reported at the end of 2017 in the financial statements

The profit on the sale of $121,000 must be deferred and amortized over the lease period. The delayed profit must be recorded identically since the leased asset is depreciated using the year-to-date method. As a result, the first year's profit will be $22,000 (10/55 $121,000).