Question

In January 1, 2018, Hester Co. sells machinery to Beck Corp. at its fair value of $960,000 and leases it back. The machinery had a carrying value of $840,000, the lease is for 10 years and the implicit rate is 10%. The lease payments of $142,000 starting on January 1, 2018. Hester uses straight-line depreciation and there is no residual value.

Hesters Co journal entry is presented below

Hester Co. (Lessee) January 1, 2018

Cash   A/C     Dr                                                    960,000

To Equipment                                                      840,000

To Unearned Profit on Sale-Leaseback            120,000

Leased Equipment     A/C   Dr                            960,000

To Lease Liability                                                  960,000

Lease Liability A/C Dr                                        142,000

To Cash                                                                  142,000

December 31, 2018

Depreciation Expense A/C Dr                                           96,000

To Accumulated Depreciation—Leased Equipment          96,000

Unearned Profit on Sale-Leaseback    A/C Dr                    12,000

To Depreciation Expense                                                     12,000

Interest Expense   A/C    Dr [10% × ($960,000 – $142,000)]              81,800

To                    Interest Payable                                                              81,800

Instructions Prepare all of Becks entries for 2018.

Answer 1