- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 8. Topics in Long-Term Liabilities and Equity
- Subject 4. Accounting and Reporting by the Lessor
CFA Practice Question
Cooper Construction Company sold a building to Harmony Manufacturing, Inc. and immediately leased it back at a $30,000 gain. The lease qualifies as a capital lease. How should Cooper account for the $30,000 gain, according to U.S. GAAP?
B. Recognize the $30,000 at the end of the lease.
C. Amortize the $30,000 to income over the life of the leased asset.
D. Amortize the $30,000 to income in proportion to the rental payment.
A. Recognize the $30,000 immediately.
B. Recognize the $30,000 at the end of the lease.
C. Amortize the $30,000 to income over the life of the leased asset.
D. Amortize the $30,000 to income in proportion to the rental payment.
Correct Answer: A
This is the proper treatment for a sales-type lease under a capital lease if the present value of the lease payment is greater than the value of the leased asset.
User Contributed Comments 5
| User | Comment |
|---|---|
| kalps | Capital implies that the lease remains the property of the original owner |
| richyrich | On page 463, it says that the 'when a company enters into a sales type lease, it will show aprofit on the transaction in the year of inception and interest revenue oover thelife' therefore the answer is A. |
| sjurrens | kalps: you've got it backwards. Capital Lease actually transfers the property over to the entity purchasing it at the end of the lease. Operating leases are the ones that the lessor keeps the asset. |
| Sp1993 | Sorry to be a pain but could someone please explain whether Cooper is the lessee or lessor in this transaction- since it's leasing the building back off Harmony it's subject to lessee accounting practices right? Thank you very much :) |
| Sp1993 | Ok read the notes and discovered that the Q refers to a "Sale-leaseback" type transaction. Thanks |