Communication Case 15–5 Where’s the gain? Appendix General Tools is seeking ways to maintain and improve cash balances. As company controller, you have proposed the sale and leaseback of much of the company’s equipment. As seller-lessee, General Tools would retain the right to essentially all of the remaining use of the equipment. The term of the lease would be six years. You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn’t understand the way you will account for the transaction. “I really had counted on that gain on the sale portion of the transaction to bolster this period’s earnings. What gives?” he wondered. “Put it in a memo, will you? I’m having trouble following what you’re saying to me.” Required: Write a memo to your CFO. Include discussion of each of these points: 1. How the transaction should be accounted for. 2. Why General Tools will not get the gain the CFO had counted on.
Communication Case 15–5 Where’s the gain? Appendix General Tools is seeking ways to maintain and improve cash balances. As company controller, you have proposed the sale and leaseback of much of the company’s equipment. As seller-lessee, General Tools would retain the right to essentially all of the remaining use of the equipment. The term of the lease would be six years. You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn’t understand the way you will account for the transaction. “I really had counted on that gain on the sale portion of the transaction to bolster this period’s earnings. What gives?” he wondered. “Put it in a memo, will you? I’m having trouble following what you’re saying to me.” Required: Write a memo to your CFO. Include discussion of each of these points: 1. How the transaction should be accounted for. 2. Why General Tools will not get the gain the CFO had counted on.
Solution Summary: The author explains that lease lease is a contractual agreement whereby the right to use an asset is provided by the owner to the user of the asset.
General Tools is seeking ways to maintain and improve cash balances. As company controller, you have proposed the sale and leaseback of much of the company’s equipment. As seller-lessee, General Tools would retain the right to essentially all of the remaining use of the equipment. The term of the lease would be six years.
You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn’t understand the way you will account for the transaction. “I really had counted on that gain on the sale portion of the transaction to bolster this period’s earnings. What gives?” he wondered. “Put it in a memo, will you? I’m having trouble following what you’re saying to me.”
Required:
Write a memo to your CFO. Include discussion of each of these points:
1. How the transaction should be accounted for.
2. Why General Tools will not get the gain the CFO had counted on.
Choose the items of income or expense that belong in the described areas of Form 1120, Schedule M-1 (Sections: Income subject to tax not recorded on books, Expenses recorded on books this year not deducted on this return, Income recorded on books this year not included on this return, and Deductions on this return not charged against book income.) Note the appropriate amount for the item selected under each section. If the amount decreases taxable income relative to book income, provide the amount as a negative number. If the amount increases taxable income relative to book income, provide the amount as a positive number.
The following adjusted revenue and expense accounts appeared in the accounting records of Pashi, Inc., an accrual basis taxpayer, for the year ended December 31, Year 2.
Revenues
Net sales
$3,000,000
Interest
18,000
Gains on sales of stock
5,000
Key-man life insurance proceeds
100,000
Subtotal
$3,123,000
Costs and Expenses
Cost of…
Please provide the accurate answer to this general accounting problem using valid techniques.
Solve this Question Accurate with General Accounting Solving method
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.