Question

Exercise 116 On January 1, 2018, Morris Company sells land to Lopez Corporation for $8,122,200, and immediately leases the land back. The following information relates to this transaction:

1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.

2. The land has a cost basis of $6,722,200 to Morris.

3. The lease agreement calls for equal rental payments of $756,900 at the beginning of each year.

4. The land has a fair value of $8,105,100 on January 1, 2018.

5. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 9%.

6. Morris Company pays all executory costs which total $257,300 in 2018.

7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Prepare the journal entries for the entire year 2018 on the books of Morris Company to reflect the above sale and lease transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2018

(To record sale)

January 1, 2018

(To record lease)

Throughout 2018

December 31, 2018

(To record amortization of profit on sale)

December 31, 2018

(To record interest payment)

Prepare the journal entries for the entire year 2018 on the books of Lopez Corporation to reflect the above purchase and lease transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2018

January 1, 2018

December 31, 2018

Date

Account Titles and Explanation

Debit

Credit

January 1, 2018

    Cash    Executory Costs    Interest Receivable    Interest Revenue    Lease Receivable    Interest Expense    Land    Executory Costs Payable    Leased Land    Accounts Payable and Cash    Interest Payable    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Lease Liability   

//<[CDATA[ (function(){window.pagespeed=window.pagespeed||{};var a=window.pagespeed;function b(){}b.prototype.a=function(d,e,c){if(d=document.getElementById(d))if(e=document.getElementById(e))if(c=document.getElementById(c))e.src=d.getAttribute(“src”),c.parentNode.removeChild(c)};b.prototype.inlineImg=b.prototype.a;a.b=function(){a.dedupInlinedImages=new b};a.dedupInlinedImagesInit=a.b;})(); pagespeed.dedupInlinedImagesInit(); //]]>//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S32','pagespeed_script_3'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S34','pagespeed_script_5'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S36','pagespeed_script_7'); //]]>    Revenue from Sale-Leaseback    Land    Accounts Payable and Cash    Unearned Profit on Sale-Leaseback    Cash    Executory Costs    Interest Payable    Interest Revenue    Executory Costs Payable    Lease Receivable    Interest Expense    Lease Liability    Interest Receivable    Leased Land   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S38','pagespeed_script_9'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S310','pagespeed_script_11'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S312','pagespeed_script_13'); //]]>    Interest Receivable    Accounts Payable and Cash    Interest Payable    Land    Leased Land    Executory Costs Payable    Interest Revenue    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Lease Liability    Cash    Executory Costs    Lease Receivable    Interest Expense   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S314','pagespeed_script_15'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S316','pagespeed_script_17'); //]]>

 

(To record sale)

 

 

January 1, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S318','pagespeed_script_19'); //]]>    Land    Accounts Payable and Cash    Interest Revenue    Leased Land    Cash    Lease Liability    Unearned Profit on Sale-Leaseback    Executory Costs    Revenue from Sale-Leaseback    Executory Costs Payable    Interest Expense    Interest Receivable    Interest Payable    Lease Receivable   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S320','pagespeed_script_21'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S322','pagespeed_script_23'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S324','pagespeed_script_25'); //]]>    Leased Land    Interest Expense    Accounts Payable and Cash    Executory Costs Payable    Lease Liability    Revenue from Sale-Leaseback    Cash    Lease Receivable    Interest Payable    Unearned Profit on Sale-Leaseback    Executory Costs    Interest Receivable    Interest Revenue    Land   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S326','pagespeed_script_27'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S328','pagespeed_script_29'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S330','pagespeed_script_31'); //]]>    Leased Land    Lease Liability    Land    Executory Costs    Lease Receivable    Interest Revenue    Executory Costs Payable    Revenue from Sale-Leaseback    Interest Payable    Unearned Profit on Sale-Leaseback    Interest Expense    Interest Receivable    Accounts Payable and Cash    Cash   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S332','pagespeed_script_33'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S334','pagespeed_script_35'); //]]>

 

(To record lease)

 

 

Throughout 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S336','pagespeed_script_37'); //]]>    Executory Costs Payable    Revenue from Sale-Leaseback    Interest Revenue    Lease Liability    Interest Payable    Interest Expense    Cash    Interest Receivable    Leased Land    Lease Receivable    Land    Unearned Profit on Sale-Leaseback    Accounts Payable and Cash    Executory Costs   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S338','pagespeed_script_39'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S340','pagespeed_script_41'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S342','pagespeed_script_43'); //]]>    Leased Land    Interest Revenue    Unearned Profit on Sale-Leaseback    Cash    Land    Executory Costs    Lease Liability    Lease Receivable    Interest Receivable    Revenue from Sale-Leaseback    Executory Costs Payable    Interest Expense    Interest Payable    Accounts Payable and Cash   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S344','pagespeed_script_45'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S346','pagespeed_script_47'); //]]>

December 31, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S348','pagespeed_script_49'); //]]>    Executory Costs Payable    Executory Costs    Cash    Interest Expense    Lease Liability    Revenue from Sale-Leaseback    Interest Payable    Accounts Payable and Cash    Interest Receivable    Land    Interest Revenue    Leased Land    Unearned Profit on Sale-Leaseback    Lease Receivable   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S350','pagespeed_script_51'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S352','pagespeed_script_53'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S354','pagespeed_script_55'); //]]>    Leased Land    Accounts Payable and Cash    Executory Costs Payable    Interest Payable    Interest Expense    Interest Receivable    Lease Liability    Interest Revenue    Lease Receivable    Cash    Land    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Executory Costs   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S356','pagespeed_script_57'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S358','pagespeed_script_59'); //]]>

 

(To record amortization of profit on sale)

 

 

December 31, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S360','pagespeed_script_61'); //]]>    Interest Expense    Interest Payable    Interest Receivable    Interest Revenue    Executory Costs Payable    Land    Leased Land    Lease Liability    Lease Receivable    Accounts Payable and Cash    Cash    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Executory Costs   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S362','pagespeed_script_63'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S364','pagespeed_script_65'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S366','pagespeed_script_67'); //]]>    Lease Receivable    Interest Expense    Cash    Lease Liability    Interest Payable    Land    Interest Receivable    Interest Revenue    Unearned Profit on Sale-Leaseback    Executory Costs    Accounts Payable and Cash    Leased Land    Executory Costs Payable    Revenue from Sale-Leaseback   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S368','pagespeed_script_69'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S370','pagespeed_script_71'); //]]>

 

(To record interest payment)

Prepare the journal entries for the entire year 2018 on the books of Lopez Corporation to reflect the above purchase and lease transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S372','pagespeed_script_73'); //]]>    Accounts Payable and Cash    Interest Revenue    Executory Costs Payable    Interest Expense    Executory Costs    Interest Receivable    Lease Receivable    Interest Payable    Unearned Profit on Sale-Leaseback    Revenue from Sale-Leaseback    Cash    Land    Leased Land    Lease Liability   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S374','pagespeed_script_75'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S376','pagespeed_script_77'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S378','pagespeed_script_79'); //]]>    Interest Revenue    Interest Receivable    Revenue from Sale-Leaseback    Lease Liability    Land    Leased Land    Lease Receivable    Unearned Profit on Sale-Leaseback    Interest Expense    Accounts Payable and Cash    Cash    Executory Costs    Executory Costs Payable    Interest Payable   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S380','pagespeed_script_81'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S382','pagespeed_script_83'); //]]>

 

(To record purchase)

 

 

January 1, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S384','pagespeed_script_85'); //]]>    Lease Receivable    Land    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Accounts Payable and Cash    Cash    Interest Payable    Lease Liability    Interest Receivable    Interest Revenue    Leased Land    Executory Costs    Executory Costs Payable    Interest Expense   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S386','pagespeed_script_87'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S388','pagespeed_script_89'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S390','pagespeed_script_91'); //]]>    Lease Liability    Interest Revenue    Executory Costs Payable    Interest Receivable    Land    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Leased Land    Accounts Payable and Cash    Lease Receivable    Cash    Executory Costs    Interest Expense    Interest Payable   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S392','pagespeed_script_93'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S394','pagespeed_script_95'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S396','pagespeed_script_97'); //]]>    Accounts Payable and Cash    Lease Liability    Executory Costs    Executory Costs Payable    Leased Land    Interest Expense    Cash    Interest Payable    Lease Receivable    Revenue from Sale-Leaseback    Unearned Profit on Sale-Leaseback    Interest Receivable    Interest Revenue    Land   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S398','pagespeed_script_99'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3100','pagespeed_script_101'); //]]>

 

(To record the leaseback)

 

 

December 31, 2018

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3102','pagespeed_script_103'); //]]>    Cash    Interest Payable    Leased Land    Accounts Payable and Cash    Executory Costs Payable    Interest Receivable    Executory Costs    Unearned Profit on Sale-Leaseback    Lease Liability    Interest Expense    Revenue from Sale-Leaseback    Interest Revenue    Lease Receivable    Land   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3104','pagespeed_script_105'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3106','pagespeed_script_107'); //]]>

 

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3108','pagespeed_script_109'); //]]>    Interest Payable    Lease Receivable    Executory Costs    Leased Land    Lease Liability    Cash    Interest Receivable    Revenue from Sale-Leaseback    Executory Costs Payable    Interest Expense    Interest Revenue    Land    Unearned Profit on Sale-Leaseback    Accounts Payable and Cash   

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3110','pagespeed_script_111'); //]]>

//<[CDATA[ pagespeed.dedupInlinedImages.inlineImg('pagespeed_img_tDk-KmT9S31','pagespeed_img_tDk-KmT9S3112','pagespeed_script_113'); //]]>