Accounting for Lease

Questions: Owing to low liquidity, Lisa Ltd decides on 1 July 2015 to sell its land and buildings to Anderson Ltd. The carrying values of the land and buildings in the books of Lisa Ltd, at 1 July 2015, are: Buildings, at cost Accumulated depreciation The land and buildings are sold for $4334 700 (their fair value), with the amount being allocated equally as follows: Land $2167350 Buildings $2167350 Immediately following the sale, Lisa Ltd decides to lease back the land and buildings from Anderson Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 12 per cent. It is expected that the buildings will be demolished at the end of the lease term. The lease is non-cancellable, returns the land and buildings to Anderson Ltd at the end of the lease, and requires the following lease payments: Payment on inception of the lease on 1 July 2015 $600000 Payment on 30 June each year starting 30 June 2016 $500000 There is no residual payment required REQUIRED a. Provide the entries for the sale and leaseback in the books of Lisa Ltd as at 1 July 2015. b. Provide the entries for the purchase and lease in the books of Anderson ltd as at 1 July 2015 c. Provide the entries in the books of Lisa Ltd as at 30 June 2025. d. Provide the entries in the books of Anderson Ltd as at 30 June 2025. Answers: The initial step is to undergo the calculation for ascertaining the gain/losses realised by the company due to the sale and lease back arrangement. It is imperative to note that on land there is no depreciation, hence all the accumulated depreciation that is represented in on account of buildings only. Lands carrying value = $ 1,800,000 Lands selling value = $ 2,167,350 Capital gain realised on land = 2167350 1800000 = $367,350 Buildings carrying value = $ 1,750,000 - $350,000 = $1,400,000 Buildings selling value = $ 2,167,350 Capital gain realised on building = 2167350 1400000 = $767,350 The assets in the case given are of different nature as explained above. Hence, the land lease is operating lease while the building lease is financial lease in nature. The key reasoning for the above classification is the fact that at the termination of the lease period, the destruction of buildings take place while the land continues to remain intact. The requisite journal entries for Lisa Ltd are shown below. The requisite journal entries for Anderson Ltd are shown below.The depreciation on buildings on an annual basis = 2167350/20 = $ 108,367.5 Additionally, the realisable gains due to the buildings = 767350/20 = $ 38,367.5 The requisite journal entries for Lisa Ltd are shown below.The requisite journal entries for Anderson Ltd are shown below.