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sale leaseback transaction smalltown grocers sold its plant facilities to united gro 692675

Sale Leaseback Transaction

Smalltown Grocers sold its plant facilities to United Grocers, Inc., for $813,487. United immediately leased the building back to Smalltown for 20 annual payments of $96,000 with the first payment due immediately. The terms of the lease agreement provide a bargain purchase option wherein Smalltown has the option of purchasing the building at the end of the lease term for $100,000.If United’s implicit interest rate is 12% (lower than Smalltown’s incremental borrowing rate), prepare the entries that should be made by United to record the purchase of the building and the receipt of the first two payments from Smalltown Grocers, assuming this leasing arrangement qualifies as a capital lease for United.

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