On January 1, 2020, Sarasota Animation sold a truck to Peete Finance for $48,000 and immediately leased it back. The truck was carried on Sarasota’s books at $44,000. The term of the lease is 5 years, there is no bargain purchase option, and title does not transfer to Sarasota at lease-end. The lease requires 5 equal rental payments of $11,395 at the end of each year (first payment on January 1, 2018). The appropriate rate of interest is 6%, the truck has a useful life of 5 years, with no expected residual value at the end of the lease term. Prepare Sarasota’s 2020 journal entries.

Dr cash   $48,000

Cr Truck account                  $44,000

Cr gain on disposal of truck  $4,000

Dr right-of-use asset $48,000

Cr lease liability                        $48,000

Dr lease expense($9600+$2880)    $ 12,480  

Cr right-of-use asset                                       $9,600

Cr lease liability                                               $2,880

Explanation:

The sale of the asset to Peete Finance implies  for $48,000 implies that cash is debited with $48,000 while truck is credited with the book value of $44,000  with the difference of $4,000 credited to gain on disposal

The amount to recognize in right-of-use asset in respect of the lease is the present value of lease payments computed thus:

=-pv(rate,nper,pmt,fv)

rate is the rate of interest of 6%

nper is the number of years of lease which is 5

pmt is annual lease rental of $11,395

fv is the future value of lease payments which is unknown

=-pv(6%,5,11395,0)=$48,000

Depreciation charge=$48,000/5=$ 9,600

Interest expense=$48,000*6%=$2880

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