Question

At the beginning of current year, ABC sold a building and immediately lease it back. The...

  1. At the beginning of current year, ABC sold a building and immediately lease it back. The following data pertain to the sale and leaseback transaction:

Sale price at above fair value                                                        9,000,000

Fair value of building                                                                     8,000,000

Carrying amount of building                                                         7,200,000

Annual rental payable at the end of each year                              600,000

Remaining life of building                                                             20 years

Lease term                                                                                   4 years

Implicit interest rate                                                                    12%

PV of an ordinary annuity of 1 at 12% for 4 periods                      3.037

REQUIRED:

1.Gain on right of transferred to buyer lessor?

A.717,780

B.400,000

C.800,000

D.720,000

2. What is the cost of right of asset?

a.1,639,980

b.411,100

c.822,200

d.739,980

3.What is the initial lease liability?

a.1,000,000

b.1,200,000

c.2,400,000

d.1,822,200


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Homework Answers

Answer #1

(1) Gain on Right transferred to Buyer Lessor :

= Sale Price of the asset - Carrying amount of the asset - (Sale Value of the asset - Fair Value fo the asset)

= 90,00,000 - 72,00,000 - (90,00,000 - 80,00,000)

= 18,00,000 - 10,00,000

= 8,00,000

Therefore Option "C" is the right answer.

(2) Cost of the right of Asset :

= Initial Lease Liability - Difference Between Sale Value and Fair Value of the asset

= Lease Payments per year * PV of Annuity Factor for 4 Years @12% - (Sale Price - Fair Value)

= 6,00,000 *3.037 - (90,00,000 - 80,00,000)

= 18,22,200 - 10,00,000

= 8,22,200

Therefore Cost of the right of asset = 8,22,200

(3) Initial Lease Liability :

= Lease Payments per year * PV of Annuity Factor for 4 Years @12%

= 6,00,000 * 3.037

= 18,22,200

Therefore Initial Lease Liability = 18,22,200

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