Question

On January 1, 2017, Irwin Animation sold a truck to Peete Finance for \(33,000 and immediately leased it back. The truck was carried on Irwin’s books at \)28,000. The term of the lease is 5 years, and title transfers to Irwin at lease-end. The lease requires five equal rental payments of $8,705 at the end of each year. The appropriate rate of interest is 10%, and the truck has a useful life of 5 years with no salvage value. Prepare Irwin’s 2017 journal entries.

Short answer

Leased equipment is $33,000

Accumulated depreciation is $6,600

Depreciation expense is $1,000

Step-by-step solution

Meaning of Leaseback

The term leaseback is an agreement in which a firm sells the asset while obtaining a long-term lease from the buyer for the continued use of the deeded asset. It is a process that involves selling an item and then leasing a portion of that assetback to the seller for future use.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
	Cash	33,000
	Trucks		28,000
	Unearned Profit on Sales Leaseback		5,000
	Leased Equipment	33,000
	Lease Liability		33,000

Working Notes:-

Calculation of Leased Equipment

$$\begin{gathered} Leasedequipment=Rentalpayments\times Presentvalueofannuity \\ =\$8,705\times 3.79079 \\ =\$33,000 \end{gathered}$$

Note:$1 difference due to rounding

Present value of an annuity due of 1 for 5 periods at 10%

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	6,600
	Accumulated Depreciation Capital Leases		6,600
	Unearned Profit on Sale Leaseback	1,000
	Depreciation Expense		1,000
	Interest Expense	3,300
	Lease Liability	5,405
	Cash		8,705

Working Notes:-

Calculation of Accumulated depreciation

$$\begin{gathered} \text{Accumulated}\text{depreciation =}\frac{\text{Equipment}\text{value}}{\text{Useful}\text{life}} \\ =\frac{\$33,000}{5} \\ =\$6,600 \end{gathered}$$

Calculation of Depreciation expense

$$\begin{gathered} \text{Depreciation}\text{expense =}\frac{\text{Unearned}\text{profit}\text{on}\text{sales}}{\text{Useful}\text{life}} \\ =\frac{\$5,000}{5} \\ =\$1,000 \end{gathered}$$