Lessee and lessor accounting (sale-leaseback)
On January 1, 2020, Baritone Inc. sells machinery to Contralto Corp. at its fair value of $ 1,200,000 and immediately leases it back. The machinery's original cost was $ 2,000,000, and its book value at January 1, 2020 was $ 1,050,000. The lease is for 10 years and the implicit interest rate is 10%. The lease payments of $ 177,500 start on January 1, 2020. Baritone uses straight-line depreciation and assumes there will be no residual value at the end of the 10 years. Assume this lease will be accounted for as a capital (finance) lease by both parties.
Instructions
a) Prepare all of Baritone's 2020 entries to reflect the above sale and lease transactions.
b) Prepare all of Contralto's 2020 entries to reflect the above sale and lease transactions.

Question

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The Answer of Lessee and lessor accounting (sale-leaseback)
On January 1, 2020, Baritone Inc. sells machinery to Contralto Corp. at its fair value of $ 1,200,000 and immediately leases it back. The machinery's original cost was $ 2,000,000, and its book value at January 1, 2020 was $ 1,050,000. The lease is for 10 years and the implicit interest rate is 10%. The lease payments of $ 177,500 start on January 1, 2020. Baritone uses straight-line depreciation and assumes there will be no residual value at the end of the 10 years. Assume this lease will be accounted for as a capital (finance) lease by both parties.
Instructions
a) Prepare all of Baritone's 2020 entries to reflect the above sale and lease transactions.
b) Prepare all of Contralto's 2020 entries to reflect the above sale and lease transactions.

Lessee and Lessor Accounting (Sale-Leaseback)