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Question
On July 1, 2012, Colby Company sold equipment to Cheddar Corporation and simultaneously leased it back for five years. The equipment's fair market value on July 1, 2012 was $875,000 and its book value was $700,000. Colby and Cheddar agreed to an 8% interest rate with respect to the lease transaction. The equipment has a remaining life of five years and an estimated salvage value of zero after five years. Colby is required to make annual payments of $202,916 beginning July 1, 2012.
Required:
Prepare the necessary journal entries for Colby Company to record the sale-leaseback for the year ended December 31, 2012. Assume that the lease qualifies as a capital lease from Colby's perspective.
Answer
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