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Prepare the journal entries to account the sale

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Reference no: EM133137580

Question 1 - LEE CORP., a dealer of specialized machinery, leased an equipment with a cost of P1,000,000 to another entity. On January 1, 2021, the company incurred direct cost related to the negotiation and arranging the lease agreement at P50,000. The lease is appropriately accounted for on the books of LEE as a sales-type lease. The other entity shall pay P400,000 annually for five years every December 31, starting 2021. The equipment has a useful life of six years. The implicit rate as a result of the direct lease cost was at 10%.The asset has an estimated residual value of P100.000 after five years and shall be reverted back to the company after the lease term.

Required - Answer the following assuming the residual value is guaranteed and assuming it is unguaranteed.

1. What is the amount to be credited to sales account as a result of the transaction?

2. What is cost of sales?

3. What is the profit from sale that should be immediately recognized by LEE CORP.?

4. What is the interest income to be recognized in 2021?

Question 2 - On January 1, 2020, NARUTO CORP. sells a building to HINATA CORP. and simultaneously leases it back. Additional information follows:

Fair value of the building 500,000

Carrying amount of building 400,000

Remaining useful life of building 10 years

Lease term 5 years

Annual rent payable at the end of each year 50,000

Implicit interest rate equal to market rate 12%

The transfer qualifies as a sale.

Required - Prepare the journal entries to account the sale and leaseback transaction on both books of the sellerlessee and buyer-lessor under the following assumptions:

1. The sale price is P500,000

2. The sale price is P550,000

3. The sale price is P450,000

Reference no: EM133137580

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