Presented below are four independent situations. All the companies involved use ASPE.

1. On December 31, 2014, Zarle Inc. sold equipment to Orfanakos Corp. and immediately leased it back for 10 years. The equipment's selling price was $520,000, its carrying amount $400,000, and its estimated remaining economic life 12 years.

2. On December 31, 2014, Tessier Corp. sold a machine to Cross Ltd. and simultaneously leased it back for one year. The machine's selling price was $480,000, its carrying amount was $420,000, and it had an estimated remaining useful life of 14 years. The rental payments' present value for one year is $35,000.

3. On January 1, 2014, 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 airplane's selling price 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 straight-line depreciation method.

4. On January 1, 2014, Barnes Corp. sold equipment with an estimated useful life of five years. At the same time, Barnes leased back the equipment for two years under a lease classified as an operating lease. The equipment's selling price (fair value) was $212,700, the carrying amount was $300,000, the monthly rental under the lease was $6,000, and the rental payments' present value was $115,753.

Instructions

(a) For situation 1: Determine the amount of unearned profit to be reported by Zarle Inc. from the equipment sale on December 31, 2014.

(b) For situation 2: At December 31, 2014, how much should Tessier report as unearned profit from the sale of the machine?

(c) For situation 3: Discuss how the gain on the sale should be reported by McKane at the end of 2014 in the financial statements.

(d) For situation 4: For the year ended December 31, 2014, identify the items that would be reported on Barnes’s income statement related to the sale-leaseback transaction.