FAR 12.06 - SALE: LEASEBACK Flashcards
FAR 12.06 - SALE: LEASEBACK
On December 31, 20X2, Dirk Corp. sold Smith Co. two airplanes and simultaneously leased them back.
Additional information pertaining to the sale-leasebacks follows:
Plane #1 / Plane #2 Sales price: $600,000 / $1,000,000 Carry amt, 12/31/X2: $100,000 / $550,000 Remain useful life, 12/31/X2: 10 yrs / 35yrs Lease term: 8 years / 3 years Annual lease pay: $100,000 / $30,000
In its December 31, 20X2, balance sheet, what amount should Dirk report as deferred gain on these transactions?
$450,000
$950,000
$0
$500,000
$500,000
In the lease on plane #1, the seller-lessee retains substantial risks and rights in relation to the plane and the gain of $500,000 would be deferred.
In the lease on plane #2, the 3 years rent at $30,000 per year represents less than 10% of the $1,000,000 sales price of the property.
It is a minor leaseback and Dirk will recognize the gain of $450,000. The total gain to be deferred by Dirk would be $500,000.
- If PV of Rental Payments is > 10% but < 90% of FV => Defer Gain up to PV, recognize rest immediately = $500,000
- If PV of Rental Payments < 10% of FV => Recognize today = $450,000
FAR 12.06 - SALE: LEASEBACK
In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale leaseback and subsequently amortized when
I. The seller-lessee has transferred substantially all the risks of ownership
II. The seller-lessee retains the right to substantially all of the remaining use of the property.
Neither I nor II
II only
Both I and II
I only
II only
EXPLANATION:
When a seller-lessee has transferred substantially all the risks of ownership to the buyer-lessor, the leaseback will be considered a minor leaseback.
The seller-lessee will report the sale as a separate transaction, recognizing any gain or loss.
When a seller-lessee retains the right to substantially all of the remaining use of the property, the sale and the leaseback are viewed as related transactions.
Any gain on the sale is deferred and amortized over the term of the lease.
The amortization reduces rent expense if the leaseback is accounted for as an operating lease, or reduces amortization of the leased asset if accounted for as a capital lease.
FAR 12.06 - SALE: LEASEBACK
On June 30, 20X2, Lang Co. sold equipment with an estimated useful life of eleven years and immediately leased
it back for ten years.
The equipment’s carrying amount was $450,000; the sales price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000.
In its June 30, 20X2, balance sheet, what amount should Lang report as deferred loss?
$0
$35,000
$20,000
$15,000
$20,000
EXPLANATION:
Since the fair value of the equipment was $465,000 compared to a carrying amount of $450,000, the equipment had actually increased in value and the loss on sale was not a real economic loss.
As a result, the entire $20,000 loss will be deferred and amortized over the term of the lease as an increase in either rent expense if the lease is classified as an operating lease, or depreciation expense if the lease is classified as a capital lease.
