To raise operating funds, North American Courier Corporation sold its building on January 1, 2016, to an insurance company for $540,000 and immediately leased the building back. The lease is for a 10-year period ending December 31, 2025, at which time ownership of the building will revert to North American Courier. The building has a book value of $400,000 (original cost $1,000,000). The lease requires North American to make payments of $87,882 to the insurance company each December 31. The building had a total original useful life of 30 years with no residual value and is being depreciated on a straight-line basis. The lease has an implicit rate of 10%.

Required:

1. Prepare the appropriate entries for North American on (a) January 1, 2016, to record the sale-leaseback and (b) December 31, 2016, to record necessary adjustments.

2. Show how North American’s December 31, 2016, balance sheet and income statement would reflect the sale-leaseback.