Question

*E 21-16 (L05) (Lessee-Lessor, Sale-Leaseback) The following are four independent situations.
(a) On December 31, 2017, Zarle Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years.
The sales price of the equipment was $520,000, its carrying amount is $400,000, and its estimated remaining economic
life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on
December 31, 2017.
(b) On December 31, 2017, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The
sales price of the machine was $480,000, the carrying amount is $420,000, and it had an estimated remaining useful life
of 14 years. The present value of the rental payments for the one year is $35,000. At December 31, 2017, how much
should Wasicsko report as deferred revenue from the sale of the machine?
Problems 1245
(c) On January 1, 2017, McKane Corp. sold an airplane with an estimated useful life of 10 years. At the same time, McKane
leased back the plane for 10 years. The sales price of the airplane was $500,000, the carrying amount $379,000, and the
annual rental $73,975.22. McKane Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation
method. Discuss how the gain on the sale should be reported at the end of 2017 in the financial statements.
(d) On January 1, 2017, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth
leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value)
of the equipment was $212,700, the carrying amount is $300,000, the monthly rental under the lease is $6,000, and the
present value of the rental payments is $115,753. For the year ended December 31, 2017, determine which items would
be reported on its income statement for the sale-leaseback transaction.

Answer 1

a)	The amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017 = Sales Price -Carrying amount
	=$520,000- $400,000
	= $120,000
	Lease period covers almost more than 80% of balance life of asset, so this is a capital lease. So, the difference between sale value and carrying value will be deferred and amortized for next 10 years.No amortisation is done in 2017 as lease take place in 2017 only.
b)	Sale and lease back transaction are distinct as this is not capital lease. So no consideration given to annual lease rental and all of gain will be recognized immediately without deferring. So,deferred revenue to be reported = $0
	The amount of gain to be reported= $480,000- $420,000 = $60,000
c)	Lease period covers almost more than 80% of balance life of asset, so this is a capital lease. hence, gain on sale will be deferred and amortized for 10 years based on sum of years digit factor as calculated below.
	sum of years digit depreciation fcator = n (n+1) / 2 = 10 (10+1) / 2 = 55.
	gain = sales price - carrying value = $500,000-$379,000 = $121,000
	The gain on the sale should be reported for 2017 = $121,000 *10/55 = $22,000
d)	Sales value is lower than carrying value, so loss should recognized immediately.
	Loss = Carrying Value - Sales price
	= $300,000-$212,700
	=$87,300
	Rent Expenses for the year = $6,000*12 month = $72,000
	Loss of $87,300 and Rent of $72,000 will be be reported on its income statement for the sale-leaseback transaction.