On January 1, 2017, Irwin Animation sold a truck to Peete Finance for $35,000 an
ID: 2515817 • Letter: O
Question
On January 1, 2017, Irwin Animation sold a truck to Peete Finance for $35,000 and immediately leased it back. The truck was carried on Irwin’s books at $28,000. The term of the lease is 3 years, there is no bargain purchase option, and title does not transfer to Irwin at lease-end. The lease requires three equal rental payments of $8,696 at the end of each year (first payment on January 1, 2018). The appropriate rate of interest is 6%, the truck has a useful life of 5 years, and the residual value at the end of the lease term is expected to be $14,000, none of which is guaranteed. Prepare Irwin’s 2017 journal entries.
Explanation / Answer
Journal entries in the books of Irwin Animation for the year 2017 is shown as follows:-
Journal Entries (Amounts in $)
Date Account Titles and Explanation Debit Credit Jan 1, 2017 Cash 35,000 Truck 28,000 Unearned Profit on Sale-Leaseback (35,000-28,000) 7,000 (To record the sale of truck) Jan 1, 2017 Right of Use Asset 35,000 Lease Payable 35,000 (To record the leaseback) Dec 31, 2017 Depreciation Expense [($35,000-$14,000)/3] 7,000 Right of Use Asset 7,000 (To record depreciation) Dec 31, 2017 Unearned Profit on Sale-Leaseback ($7,000/3) 2,333 Depreciation Expense 2,333 (To write off unearned profit on sale and leaseback) Jan 1, 2018 Interest Expense ($35,000*6%) 2,100 Lease Payable ($8,696-$2,100) 6,596 Cash 8,696 (To record the first lease payment)