Question

Example – sale and leaseback

Entity X sells a building to entity Y for cash of $5 million. Immediately before the transaction, the carrying amount of the building in the financial statements of entity X was $3.5 million. At the same time, X enters into a contract with Y for the right to use the building for 20 years, with annual payments of $200,000 payable at the end of each year. The terms and conditions of the transaction are such that the transfer of the building by X satisfies the requirements for determining when a performance obligation is satisfied in IFRS 15 - Revenue from Contracts with Customers. Accordingly, X and Y account for the transaction as a sale and leaseback.The fair value of the building at the date of sale is $4.5 million.The annual interest rate implicit in the lease is 5%.

(i) Compute the value of the right of use asset showing clearly your workings.

(ii) Compute any gain or loss transferred to the buyer showing clearly your workings.

(iii) Illustrate the accounting of the above at the time of sale by preparing the necessary journal entries in Needcash Ltd's book. Journal narratves are not required.

Answer 1

So the answers are as follows:-

i.) The value of the right of use asset as follows :-

Annual Interest rate implicit in the lease = 5%

PV (Present value) of the annual payments = 20 payments of $200,000 discounted at 5% comes = $2492400

Here additional financing is $500000 ($5 million - $4.5 million)

Then amount relates to lease = $2492400 - $500000 = $1992400

cumlative discount factor for 20 years for 5% = 12.462

Annual payment that would be required that would be made 20 times in arrears to repay additional amount of $500000 @ rate of interest 5% = $500000/12.462 = $40122

So the value of the right of use asset = $200000 - $40122 = $159878

Answer ii). So the buyer gain will be = $ 159878 (working as above)

Answer iii) Require In which books journal entry require.