Question

11. 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

Option B:

Higher taxable income will happen in the year of sale becasue the company has sold the office building after price appreciation. Thus, the difference between the purchase price and sale price will be charged as capital gains tax. Increasing the overall tax liability in the year of sales.

Option A : False : If the building was bought on loan earlier, then the interest expense would not change much, as the loan has been replaced by lease.

Option C : False : Cash flow will not chage much because lease payments will be there instead of mortgage payment.

Option D : False : Payments related to lease are tax deductible.