On January 1, 2018, John sold a machine to Jane for 47.6 million. but immediatel
ID: 2545548 • Letter: O
Question
On January 1, 2018, John sold a machine to Jane for 47.6 million. but immediately rented it back. This information is available: The book value of the machine was 42 million when the machine was sold. The lease term is 10 years and the deal is inseparable; Ownership disappears to John. Lease payments amount to 7.7 million at the end of each year The market rate for John are 12%, while the calculated interest rate for Jane is 10% The market price of the machine is 47.6 million on the date of sale Estimated life for the machine is 10 years John pays the annual cost of the machine 630000 What records must be made by the lessee and the lessor in 2018. Make financial entries that need to be entered in the accounts for these leases
Explanation / Answer
Sicne the ownership disappears to John at the end of the lease term, the lease is a capital lease.
WN-1:Lease liability = Present value of minimum rental payments (n=10, r=12%) = 7.7*5.6502 = 43.51 million
In Books of lessee: John Date Journal Dr. Cr. 01-Jan-18 Bank 47.60 Machinery 42.00 profit on sale of machinery 5.60 (being machinery sold) 01-Jan-18 Leased Equipment(WN-1) 43.51 Lease Liability 43.51 (being capital lease recorded) 31-Dec-18 Lease Liability 2.48 Interest Expense (43.51*0.12) 5.22 Cash 7.70 (being first lease rental paid) 31-Dec-18 Annual Maintenance Expense 0.63 Cash 0.63 (being annual cost of machine paid) 31-Dec-18 Depreciation 4.35 Accumulated Depreciation 4.35 (being depreciation (43.51/10) on SLM basis recorded)