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Question(s) / Instruction(s):

*Ex. 21-101—Lessee and lessor accounting (sale-leaseback).
On January 1, 2008, Hartig Company sells land to Ortiz Corporation for $6,000,000, and immediately leases the land back. The following information relates to this transaction:

  1.      The term of the noncancelable lease is 20 years and the title transfers to Hartig Company at the end of the lease term.
  2.      The land has a cost basis of $5,040,000 to Hartig.
  3.      The lease agreement calls for equal rental payments of $611,112 at the end of each year.
  4.      The land has a fair market value of $6,000,000 on January 1, 2008.
  5.      The incremental borrowing rate of Hartig Company is 10%. Hartig is aware that Ortiz Corporation set the annual rentals to ensure a rate of return of 8%.
  6.      Hartig Company pays all executory costs which total $255,000 in 2008.
  7.      Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions
(a)     Prepare the journal entries for the entire year 2008 on the books of Hartig Company to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.)
(b)     Prepare the journal entries for the entire year 2008 on the books of Ortiz Corporation to reflect the above purchase and lease transactions.

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