Sale Leaseback Accounting
On July 1, 2008, Baker Corporation sold equipment it had recently purchased to an unaffiliated company for $570,000. The equipment had a book value on Baker’s books of $450,000 and a remaining life of five years. On that same day, Baker leased back the equipment at $135,000 per year, payable in advance, for a 5 year period. Baker’s incremental borrowing rate is 10%, and it does not know the lessor’s implicit interest rate. What entries are required for Baker to record the transactions involving the equipment during the first full year, assuming the second lease payment is made on June 30, 2009? Ignore consideration of the lessee’s fiscal year. The lessee uses the double declining balance method of depreciation for similar assets it owns outright.