Problem 16-3

1 .Measurement of lease liability

Present value of rentals(600,000x3.791) 2,274600

2. Cost of right use asset (2,2746,00/5,000,000x4,500,000) 2,047,140

3. Gain of right transferred

Sale price 5,000,000

Carrying amount 4,500,000

Total Gain 500,000

Sale Price 5,000,000

Right retained 2,274,600

2,725,40

4. Journal Entries for 2017

Cash 5,000,000

Right of use asset 2,047,140

Equipment 4,500,000

Lease liability 2,274,600

Cash on right Transferred 272,54O

Interest Expense(10%x2,274,600) 227,960

Lease liability 372,540

Cash 600,000

Depreciation(2,047,140/5 years) 409,428

AcCumulated depreciation 409,428

5. Books of Buyer Lessor

1. Recording of assct purchased

Equipmend 5,000,000

Cash 5,000,000

2. Annual Rental Recording

Cash 600,000

Rent income 600,000

3. Recording of annual depreciation of equipment

Depreciation(5,000,000/10 Years) 500,000

Accumulated depreciation 500,000