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On January 1, 2011, Perriman Company sold equipment for cash and leased it back. As seller-lessee, Perriman retained the right to substantially all of the remaining use of the equipment.The term of the lease is 8 years. There is a gain on the sale portion of the transaction. The lease portion of the transaction is classified appropriately as a capital lease.
(a) What is the theoretical basis for requiring lessees to capitalize certain long-term leases? Do not discuss the specific criteria for classifying a lease as a capital lease.
(b) (1) How should Perriman account for the sale portion of the sale-leaseback transaction at January 1, 2011?
(2) How should Perriman account for the leaseback portion of the sale-leaseback transaction at January 1, 2011?
(c) How should Perriman account for the gain on the sale portion of the sale-leaseback transaction during the first year of the lease? Why?(AICPA adapted)
The balance in the equipment account is $904,000, and the balance in the accumulated depreciation-equipment account is $316,400.
How do they relate to the practice of accounting and its uses in business?
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