Question

XYZ Company entered into a sale-leaseback transaction with ABC Bank on January 1, 2017. On that...

XYZ Company entered into a sale-leaseback transaction with ABC Bank on January 1, 2017. On that date, XYZ Company sold ABC Bank its office building for $800,000 cash and immediately leased the building back. The operating lease is for the final 12 years of the building's estimated 50-year useful life. The building had a fair value of $800,000 and a book value of $650,000 on January 1, 2017. The original cost of the building was $1,000,000. The rental payments of $100,000 are due to ABC Bank each December 31. The lease has an implicit interest rate of 9%.

Determine the amount of gain on the sale XYZ Company should recognize on the transaction.

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Answer #1

As per the accounting standards, sale and lease back transaction has to be considered as two transactions for the accounting purpose. i.e.,1) Sale Transaction 2) Lease transaction.

Hence, the following procedure can be followed for recognition of the gain on sale.

The gain on saleof asset when sale value=fair value, can be recognised immediately in profit and loss a/c.

The gain on sale of asset will be the difference between sale value and the carrying amount.

From the given facts, Sale value= Fair Value= $8,00,000

Carrying value=$6,50,000

Hence, Gain on sale= $8,00,000-$6,50,000

= $1,50,000.

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