Reference no: EM131806304

Question - Central Purchasing Limited owns the building it uses; it had an original cost of $825,000 and a net book value of $450,000 as of 1 January 20X2. On this date, the building was sold to the Royal Leasing Company for $480,000, which also was the building's fair value, and simultaneously leased back to Central Purchasing Limited.

The lease has a guaranteed, 12-year term and required payments on 31 December of each year. The payments are $77,000, and the lease allows the property to revert to the lessee at the end of the lease. Central Purchasing could have mortgaged this property under similar terms at an interest rate of 10%. The Royal Leasing Company will pay property taxes estimated to be $6,000 per year. These costs are included in the lease payment. Central will pay maintenance and operating costs. The building is being depreciated straight-line, with an estimated remaining life of 16 years.

Required:

Prepare entries to record the sale and leaseback of the building.

Prepare year-end adjusting entries for 20X2.

Show how all amounts related to the sale and leaseback will be presented on the statement of financial position and income statement in 20X2.