On January 1, 2019, Morris Company sells land to Lopez Corporation for $10,000,000, and immediately leases the land back. The following information relates to this transaction: The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term. The land has a cost basis of $8,400,000 to Morris. The lease agreement calls for equal rental payments of $943,074 at the beginning of each year. The land has a fair value of $10,000,000 on January 1, 2019. 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 8%. Morris Company pays all executory costs which total $255,000 in 2019. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) Prepare the journal entries for the entire year 2019 on the books of Morris Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.) (b) Prepare the journal entries for the entire year 2019 on the books of Lopez Corporation to reflect the above purchase and lease transactions.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...

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Question

On January 1, 2019, Morris Company sells land to Lopez Corporation for $10,000,000, and immediately leases the land back. The following information relates to this transaction:

The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.
The land has a cost basis of $8,400,000 to Morris.
The lease agreement calls for equal rental payments of $943,074 at the beginning of each year.
The land has a fair value of $10,000,000 on January 1, 2019.
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 8%.
Morris Company pays all executory costs which total $255,000 in 2019.
Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions

(a) Prepare the journal entries for the entire year 2019 on the books of Morris Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)

(b) Prepare the journal entries for the entire year 2019 on the books of Lopez Corporation to reflect the above purchase and lease transactions.

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