To raise operating funds, North American Courier Corporation sold its building on January 1, 2011, to an insurance company for $500,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2020, at which time ownership of the building will revert to North American Courier. The building has a carrying amount of $400,000 (original cost $1,000,000). The lease requires North American to make payments of $88,492 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 12%.
Required:
1. Prepare the appropriate entries for North American on
(a) January 1, 2011, to record the sale-leaseback and
(b) December 31, 2011, to record necessary adjustments.
2. Show how North American's December 31, 2011, balance sheet and income statement would reflect the sale-leaseback.