Zhou Ltd. is a private corporation, which uses ASPE, and whose operations rely considerably on a group of technology companies that experienced operating difficulties from 2011 to 2013. As a result, Zhou suffered temporary cash flow problems that required it to look for innovative means of financing. In 2014, Zhou’s management therefore decided to enter into a sale and leaseback agreement with a major Canadian leasing company, Intranational Leasing.

Immediately after its September 30, 2014 year end, Zhou sold one of its major manufacturing sites to Intranational Leasing for $1,750,000, and entered into a 15-year agreement to lease back the property for $175,000 per year. The lease payment is due October 1 of each year, beginning October 1, 2014.

Zhou’s carrying amount of the property when sold was $250,000. The lease agreement gives Zhou the right to purchase the property at the end of the lease for its expected fair value at that time of $2.5 million. In 2014, the land is estimated to be worth 40% of the total property value, and the building, 60%. Zhou uses a 10% declining  balance method of amortizing its buildings, and has a 7% incremental borrowing rate.

Instructions
(a) Prepare all entries that are needed by Zhou to recognize the sale and leaseback transaction on October 1, 2014; any adjusting entries that are required on September 30, 2015; and the October 1, 2015 transaction.  Reversing entries are not used.
(b) Prepare all necessary note disclosures and amounts that are to be reported on Zhou’s September 30, 2015 balance sheet, income statement, and statement of cash flows for its year ended September 30, 2015.