Klear Manufacturing sells its plant with a cost of $1.2 million to Burt Company for $1.4 million and immediately leases it back for a 15-year term. The transaction does not meet the revenue recognition criteria under ASC Topic 606. At the inception of the sale and leaseback, Klear should debit cash and credit a. notes payable.
b. sales revenue.
c. lease liability.
d. the asset.

Klear Manufacturing

At the inception of the sale and leaseback, Klear should debit cash and credit

c. lease liability.

Explanation:

a) Data and Calculations:

Debit Cash $1.4 million Lease Liability $1.4 million

Debit ROU asset $1.4 million Credit Plant $1.2 million Credit Gain from Sale $0.2 million

b) The sale and leaseback creates a right of use asset as well as a lease liability.  Therefore, the Cash account is debited for the cash receipts from the transaction and the Lease Liability is credited.  Also debited is the right of use asset with corresponding credits to the Asset account and Gain from Sale.

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