Hi gang, can someone help with this sales leaseback question? My understanding is that sales leaseback gains if recognized are offset against depreciation. This answer indicates it's amortized over the lease term. Which is it or what am I missing here?
On January 1, year 1, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and a remaining useful life of 10 years, to Maco Drilling for $150,000. Hooks immediately leased the equipment back under a 10-year capital lease with a present value of $150,000 and will depreciate the equipment using the straight-line method. Hooks made the first annual lease payment of $24,412 in December year 1. In Hooks’ December 31, year 1 balance sheet, the unearned gain on equipment sale should be:
Answer: According to ASC Topic 840, sale-leaseback transactions are treated as though two transactions were a single financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). Since this is a capital lease, the entire gain ($150,000 − $100,000 = $50,000) is deferred at 1/1/Y1. At 12/31/Y1 an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 × $50,000 = $5,000), because the lease covers 10 years. Therefore, the unearned gain at 12/31/Y1 is $45,000 ($50,000 − $5,000).
BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8
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