[martimann]

Hello everyone,
I’m confused on what gets deferred on sale leasebacks. Becker gives the following formula:

Sale price
-asset NBV
————–
Tentative gain
-PV of min leaseback payments
————–
Excess gain

Then on the examples they either defer part of the tentative gain or recognize the entire tentative gain depending on a percentage (I understand the % part). So I’m asking myself what the purpose of the excess gain is. Am I understanding this incorrectly?
Any feedback helps thanks

[Mike J]

From what I understand, you have to remember the rule (below) and that there are two journal entries going on (Sales transaction & how to amortize the gain).

Rule:

PV lease pmnts ÷ PV lease asset

(1) = 1 to 10% recognize all gain on sale
(2) = 11 to 90% recognize gain up to PV lease payments
(3) = 90-100% defer all

Sale Journal Entry

Dr Cash
Cr Sales (SP)
Cr Asset (BV)
Cr Deferred Gain (above)
Cr Gain (plug)

Amortize Journal Entry

If Operating Lease
Dr Rent Exp
Cr Deferred Gain

If Capital Lease
Dr Depreciation Exp
Cr Deferred Gain

…

I hope that helps. Someone correct me if I'm wrong.

[martimann]

Thanks I guess I have to go over those two JEs again. I'm going over my notes and the JE I have for a sales type lease is:

DR Lease pmts receivable(gross investment)
CR Unearned interest revenue
CR Sales revenue
DR Cost of goods sold
CR Inventory

And for direct financing lease I have:
DR lease pmts receivable
CR unearned interest revenue
CR asset

[Mike J]

Yes. Your original post is different from your second response.

Sales Leaseback has two transactions at once. You described in the second post two scenarios of one transaction–at inception of a lease, from POV of lessOR. Of those two scenarios, is lessOR making profit off the sale AND interest or is lessOR making intetest only.

[martimann]

Oh I see,
Yes I listed the JEs for a regular capital lease either sales type or direct financing, but you're right when we have the sale leaseback we are Selling the leased property and then leasing it back. That's why your entries defer from the ones I listed.
It is slowly becoming less confusing thanks.

[Mike J]

I'm glad I could help

I HATE Becker with a passion. Memory tricks with very little substance doesn't help. Memorize the rules. But always try to put things in terms of a journal entry wherever possible.

Eg. Are you receiving cash (debit it) or else buying something (credit cash)? Are you expensing something (debit)?

eg with a Sales type lease, if you expect a gain, there will probably be a Sales (credit balance) and COGS (debit balance); opposite balances so subtracted from each other. There is inventory involved so it should closely mirror a normal inventory sale (Dr A/R; Cr Sales; Dr COGS; Cr Inventory) right?

[martimann]

Yeah,
It should work like you mentioned, becker is too comprehensive sometimes and some things well can be easy to miss. I will try to spend at least 2 days just going through every single entry listed in the chapters. I'm pretty good in making sense of them, I hope that as am reviewing the JEs all the other details about the calculations and rules also gets refreshed in my mind. It's a lot but I will try not to even think about it and just do it. Haha

[Author]

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