Reference no: EM132596908
Presented below are five independent situations. All the companies involved use ASPE, unless otherwise noted.
1. On December 31, 2020, 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 was $400,000, and its estimated remaining economic life was 12 years.
2. On December 31, 2020, 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' PV for one year is $35,000.
3. On January 1, 2020, 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' PV was $115,753.
4. On December 30, 2020, Dedresan Inc. sold a warehouse with 10 separate spaces with loading bays to Mack Finance Ltd. for $1.3 million and immediately leased back two of the 10 spaces. The warehouse was carried on Dedresan's books at $800,000 and had a remaining useful life of 15 years. The term of the lease is five years with no renewal period. Dedresan is a public company following IFRS 16 to account for its leases.
Instructions
Question 1: For situation 1: Determine the amount of unearned profit to be reported by Zarle Inc. from the equipment sale on December 31, 2020.
Question 2: For situation 2: At December 31, 2020, how much should Tessier report as unearned profit from the sale of the machine?
Question 3: For situation 3: For the year ended December 31, 2020, identify the items that would be reported on Barnes's income statement related to the sale-leaseback transaction.
Question 4: For situation 4: For the year ended December 31, 2020, identify the items that would be reported on Dedresan's income statement related to the sale-leaseback transaction.
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