[cultur3]

On June 30 of the current year, Lang Co. sold equipment with an estimated useful life of 11 years and immediately leased it back for 10 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 current-year balance sheet, what amount should Lang report as deferred loss?

The Answer is 20,000.

When a sale of property is made and a gain is realized on the sale, if the seller immediately leases the property back from the new owner, that is sometimes a justification for deferring recognition of the gain on the sale. If the sale of the asset is for a realized loss, as here, of $20,000 (sales price of $430,000 less carrying amount of $450,000), then a loss is usually recognized immediately.

There is an exception to this, and such is the case here. The loss is realized in the sales price, but the sales price is artificially too low. The asset is actually worth more than its selling price and more than its carrying value. In such a case, the loss is deferred.

Is the loss deferred over the remaining lease life? And the only reason that the loss is deferred is because the sales price was artificially too low?

All this studying is getting to me lol

F 83 4/09/16
A 85 6/10/16
B 81 7/19/16

[Mike]

Did the rules change on this question? Surgent says the answer to this question is $0.00. Here is their explanation: The first step is to determine if this transaction qualifies as a sale. Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. Since the lease term is 10/11 = 90.1% of the asset’s economic life, this does not qualify for sale/leaseback treatment. Lang will not derecognize the asset and will recognize the consideration received as a financial liability.

However, every other place on the Internet gives me the answer as $20,000.

Thoughts to aid in my confusion?

[DS]

Yes, the new lease standard in ASC 842 does not recognize the transaction as a sale if the lease is classified as a financing lease so no gain or loss will be recognized by the seller. It is treated the same as any other kind of financing. They will keep the asset on their books and continue to depreciate it and will also accrue a liability that is amortized by the lease payments.

[Author]

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