Question

A company sells an office building that has appreciated in value and subsequently enters into a lease for the space. Which of the following statements is an accurate description of both the impact, and the cause of the impact, that the sale-leaseback transaction will have on the company’s income statement?

(A) Increased interest expense due to the new lease

(B) Higher taxable income will occur in year of sale because of a gain on sale

(C) Cash flow will increase because the mortgage has been paid off

(D) Higher taxable income will be realized because lease payments are not deductible

Answer 1

Since the company sold the office building, which was appreciated in value, it will lead to profit on sale of building. This profit will be taxable for the company.

Option B.

Option A : False : Building could have been on mortgage earlier, so the intrest payment is just getting replaced and not increased.

Option C : False : instead of mortgage payment, lease payment will come, hence the cash flow won't increase.

Option D : False : payments related to lease are tax deductible