JARD-REF3-L-SALESLEASEBACK

-ADAMSON UNIVERSITY- Page 1 of 1

ACCOUNTING FOR SALES AND LEASEBACK TRANSACTIONS

A transaction where the owner of a property sells the propertyand then immediately leases all or part of it back from the newowner.

LEASEBACK RESULTING TO A FINANCE LEASE Any excess of the sales proceeds over the carrying amount

of the asset is amortized and deferred over the leaseterm.

Any excess of the carrying amount of the asset over thesales proceeds is recognized immediately.

Cash xxAccumulated Depreciation xxLoss on Sale-Leaseback* xx

Asset xxDeferred Gain on Sale-Leaseback* xx

LEASEBACK RESULTING TO AN OPERATING LEASE If the leaseback transaction is established at fair value,

there is in effect a normal sale transaction. Any profit orloss is recognized immediately.

If the leaseback transaction is established at above fairvalue, excess of the sales price over the fair value isdeferred and amortized while excess of the fair value overthe carrying amount is recognized immediately.

Cash xxAccumulated Depreciation xx

Asset xxGain on Sale xxUnearned Gain on Sale-Leaseback xx

If the leaseback transaction is established at below fairvalue, any profit or loss on the transaction is immediatelyrecognized unless the loss is compensated by futurerentals below fair market value, in which case, the loss isdeferred and amortized in proportion to the rentalpayments over the period the asset is used.

Cash xxAccumulated Depreciation xxLoss on Sale* xxDeferred Loss on Sale-Leaseback** xx

Asset xx** = loss is compensated by rentals below market value

Case 1On January 1 2013, German sold an equipment to Sterling forP1,100,000 which is the fair value of the equipment. Theequipment had a cost of P2,500,000, carrying amount ofP1,000,000 and remaining useful life of 10 years.

On the same day, German leased back the equipment for 5years for an annual rental of P40,000 payable at the beginningof each year. German has no option to renew or repurchase theequipment.

Case 2Cuba owns a building costing P5,000,000 with P3,400,000 ofaccumulated depreciation and fair value of P2,800,000. Thebuilding has a remaining useful life of 15 years.

On January 1, 2013, the building is sold to Mexico forP2,415,000 and leased back over a 10-year term, with leasepayment of P500,000 to be made at the end of each year.

The interest rate implicit is approximately 16%.

Case 3On January 1, 2013, Legend sold machinery costing P600,000with an accumulated depreciation of P250,000 for P807,640,which is also its fair value. The remaining life of the machine isfive years. Legend immediately leased the machine back forP200,000 yearly, payable in advance. The implicit interest rateis 12%.

a) Deferred gain on January 1, 2013b) Depreciation expense for the leased asset for 2013c) Interest expense for 2013d) Revenue on sale-leaseback for 2013