[jeff]

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[Anonymous]

On January 1, Year 1, a shipping company sells a boat and leases it from the buyer in a sale-leaseback transaction. At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale-leaseback transaction?

A.The boat will not be classified in property, plant, and equipment of the shipping company.

B.The shipping company will recognize the total profit on the sale of the boat in the current year.

C. The shipping company will not recognize depreciation expense for the boat in the current year.

Correct D.

The shipping company will recognize in the current year a loss on the sale of the boat.

I am confused about this question. The explanation states:

Since the lease does not meet any of the criteria for capitalization, the lease is accounted for as an operating lease. The shipping company will recognize a loss—amortized based on gross rentals.

How would I know if this lease does or does not meet any of the criteria for capitalization?

[Anonymous]

@ anna, the fair value is less than the carrying value so there is a loss and that is why D is correct.

The explanation is very confusing…you are right. I think its a capital lease since the shipping company gets the ship after the 10 yr lease..

would love to hear what others have to say…

[Anonymous]

Why is A not right then?

The problem here is, there is no way to tell if this is capital lease or not. The only thing they tell us that there will be no transfer of ownership. I don't know if other 3 criteria are met. Or am I missing something?

[samdiegoCPA]

@anjanja This is a confusing question definitely. I think if it doesn't specifically give one of the 4 criteria to be a capital lease, then you just think of it as operating. That's the only thing I can think of. I remember getting this question a few days ago and got it wrong, but added it to my notes.

AUD: 84
REG: 84
BEC: 79
FAR: 83

[Anonymous]

So we have no idea what kind of lease this is. I think the only approach is to exclude answers. A and C would both be right if this was operating lease so it's between B and D. I am still confused about types of losses in leaseback, but it's usually deferred so that's what I answered. I don't really like these type of questions where I have to think outside the box. Also still not clear about the explanation provided, doesn't sound right

[Anonymous]

2014 CPA, how do you know if there is a loss if there is no info on for how much they sold it?

[samdiegoCPA]

What do you mean, it makes perfect sense… ugh 😛

Capital lease-back:

-A loss is deferred and amortized as prepaid rent if the CV of the asset sold is > the sales price, but the FV > CV.

-A loss is recognized immediately if the CV > FV.

-A loss on a capital lease termination is recognized immediately as a loss from earnings.

Operating lease-back:

-Losses are recognized immediately.

AUD: 84
REG: 84
BEC: 79
FAR: 83

[Anonymous]

Noooooo my brain….

I have to make some kind of chart for this thing

We don't know the selling price though. I guess it's should be assumed that it's = fv. In this case it's obviously D

[Vlakmir]

Can anyone answer a question for me?

It's about book value per share.

1. Is it theoretically the value a shareholder receives upon liquidation?

and

2. When calculating Preferred Book value per share, do you not include retained earnings? Just the preferred dividends in arrears, liquidation value (including any premiums paid), and the PS par value?

For common stock you include retained earnings.

REG - 92
AUD - 90
BEC - 82
FAR - 82
BISK Review Materials
DONE! /Happydance

[Anonymous]

@samdiego: my understanding is loss is always recognized immediately under both operating and capital sales leasebacks.

@ anna: for profit and loss on a sales leaseback u don't hv to hv the selling price. Its the difference btw the carrying value and the fair value ( fair value can also be the sale price)

[HopefulCPA0601]

thanks @samdiego!

BEC: 65 - 79* - 84 DONE
AUD: 65 - 76 DONE
REG: 63 - 77 DONE
FAR: 65 - 63 - 67 - 69 - 73 - 71 - 83 DONE

Becker Notes & Flashcards, Wiley Test Bank, Ninja MCQ

[Anonymous]

Hi guys…

What's your trick for converting cash to accrual for EXPENSES?

I get SPEAR-BAR, CRAP-I, but still trying to figure out an easy to to convert expenses.

[Anonymous]

when it's a capital lease, gain and loss is deferred.

I re-read the question and it actually says that the fair value was less than its undepreciated cost. I guess there is no way to know if the FV was greater or lower than CV.

[HopefulCPA0601]

@dcflcpa – accrual to cash:

operating exp + ending prepaid exp + beg accrued payable – depr/amort – beg prepaid exp – end accrued payable = cash

BEC: 65 - 79* - 84 DONE
AUD: 65 - 76 DONE
REG: 63 - 77 DONE
FAR: 65 - 63 - 67 - 69 - 73 - 71 - 83 DONE

Becker Notes & Flashcards, Wiley Test Bank, Ninja MCQ

[Anonymous]

@hopefulCPA0601…

ok so it looks like it's just opposite signs if I use SPEAR-BAR as a reference.

Expenses -cash

– Ending Asset

+ Beg Asset

– Beg Liab

+ Ending Liab

= Expenses- accrual

Less Dep/ Amort

Thank you!

[Author]

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