Chapter 21, Problem 7CA

To determine

Lease: A contractual arrangement between the owner of the asset and the user of the asset for a fixed amount of money is termed lease. In this contract the owner of the asset permits the user to use the property for a fixed sum of money received at the time of handing over the asset. At the end of the contract tenure the user of the asset need to return the asset to the owner. The parties involved in the contract are termed the lessor the owner of the asset and the lessee the user of the asset.

Sale and leaseback lease:

1. (a) The owner of the asset sells the property or asset in the market with an agreement to lease back the same for a specific amount.
2. (b) The sale of the asset or property may be less or more than the market or fair value of the asset.
3. (c) The ownership of the asset gets transferred and the current owner of the asset becomes the lessor.
4. (d) The income of the lessee should get amortized within the tenure of the lease.
5. (e) The losses incurred due to the leased asset should be adjusted in the current year.
6. (f) The depreciation-related expenses are treated based on the nature of the asset and generally over the economic life of the asset.

Case summary: P Corporation sold an asset and leased back the same for 8 years. The property title alone is transferred; the usage right was with P Corporation. It also gained some amount out of the sale of equipment.

(a)

To determine the reason for capitalizing the long-term lease.

To determine

(b) (1)

To determine the procedure of accounting the sale and leaseback transactions.

To determine

(b)(2)

To determine the way to record the lease of the equipment.

To determine

(c)

To determine the process of amortizing the gain from the sale and leaseback transaction.