Chapter 12 - Sale And Leaseback

Question 1

An arrangement whereby one party sells a property to another party and then immediately leases the property back from its new owner.

Answer 1

Sale and leaseback

Question 2

Sale and leaseback transaction may occur when:

Answer 2

1. The seller-lessee is Experiencing cash flow or financing problem
2. There are tax advantages in such an arrangement in the lessee’s jurisdiction
3. The seller-lessee would like to avoid the burden of paying the executory costs attendant to the assets, such as repairs, insurance and taxes

Question 3

Rules if leaseback is an operating lease

Answer 3

1. If the sale and leaseback transaction is clearly established at fair value, any gain or loss on sale and leaseback shall be recognized immediately.
2. If the sale price is below fair value, any gain or loss shall also be recognized immediately.

If the loss is comoensated by future lease rental at below market value, the loss is deferred and amortized in propotion to the lease payments over the period for which the asset is expected to be used.

3. If the sale price is above fair value, the excess over fair value is deferred and amortized over the period for which the asset is expected to be used.

Question 4

The excess of sale price over the fair value is a..

Answer 4

Deferred gain

Question 5

The excess of fair value over the carrying amount is an..

Answer 5

Outright gain

Question 6

Any gain on sale and leaseback is deferred and amortized over the lease term, but any loss on sale and leaseback is recognized immediately.

Answer 6

Leaseback is a finance lease

Question 7

The lessor provides finance to the lessee with the asset as security

Answer 7

Leaseback is a finance lease

Question 8

Any deferred gain on sale and leaseback shall be amortized over the?

Answer 8

Lease term