Name: __________________________Date: _____________

1.

On January 1, 2017, Baritone Inc. sells machinery to Contralto Corp. at its fair value of $1,200,000 and immediately leases it back. The machinery's original cost was $2,000,000, and its book value at January 1, 2017 was $1,050,000. The lease is for 10 years and the implicit interest rate is 10%. The lease payments of $177,500 start on January 1, 2017. Baritone uses straight-line depreciation and assumes there will be no residual value at the end of the 10 years. Assume this lease will be accounted for as a capital (finance) lease by both parties.

Instructions

a)Prepare all of Baritone's 2017 entries to reflect the above sale and lease transactions.

b)Prepare all of Contralto's 2017 entries to reflect the above sale and lease transactions.

2.

Why would a company enter into a sale-leaseback transaction?

3.

On January 1, 2017, Kirk Corp. sells land to Spock Inc. for $2,000,000, and immediately leases the land back. Both companies follow ASPE. The following information relates to this transaction:

1.The term of the non-cancellable lease is 20 years and the title transfers to Kirk at the end of the lease term.

2.The land has a cost basis of $1,600,000 to Kirk.

3.The lease agreement calls for equal rental payments of $203,704 at the end of each year.

4.The land has a fair value of $2,000,000 on January 1, 2017.

5.The incremental borrowing rate of Kirk Corp. is 10%. Kirk is aware that Spock set the annual rentals to ensure a rate of return of 8%.

6.Kirk pays all executory costs, which total $170,000 in 2017.

7.Collectibility of the rentals is reasonably assured, and any unreimbursable costs under the lease that are likely to be incurred can be reasonably estimated by the lessor.

Instructions

a)Prepare all the 2017 journal entries on the books of Kirk Corp. to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)

b)Prepare all the 2017 journal entries on the books of Spock Inc. to reflect the above purchase and lease transactions.