On January 1, 20X1, Merchant Co. sold a tractor to Swanson Inc. and simultaneously leased it back for five years. The tractor’s fair value is $300,000, but its carrying value on Merchant’s books prior to the transaction was $200,000. The tractor has a seven-year remaining estimated useful life, and Merchant and Swanson both used 8% interest in evaluating the transaction. Merchant has agreed to make five payments of $57,976 beginning January 1, 20X1. Use tables (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

Required:

What type of a lease is this for Merchant?
Compute the amount of Merchant’s gain on the transaction.
Prepare the January 1, 20X1, entries on Merchant’s books to account for the sale and leaseback.

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