CFA Practice Question

CFA Practice Question

In a sale-leaseback transaction, the seller-lessee has retained the property. The gain on the sale should be recognized at the time of the sale-leaseback when the lease is classified as ______.
A. a capital lease
B. an operating lease
C. neither an operating nor capital lease
Explanation: The gain on the sale is not recognized at the time of the sale-leaseback. It is deferred and amortized in proportion to the amortization of the leased asset if the leaseback is classified as a capital lease. If the leaseback is classified as an operating lease, the amortization is in proportion to the gross rental payments expensed over the lease term.

User Contributed Comments 5

User Comment
alexix In the study notes, study session 10 pg25 states - Sales type lease: at inception of the lease, the gain from the sale of the lease asset is recognized...The sales-type lease reports substantially higher income at the inception of the lease, thus recognizing income earlier than an operating lease.
In this question, it seems otherwise, will someone clarify?
tianhan questions says sales-leasedback, not sales type lease.
armanaziz In sales type lease the "sale" is done by the Lessor. In sale-and-leaseback the "sale" is done by the lessee.
sbakar What other sales-leaseback classifications exist if "neither an operating nor capital lease?" The answer depends on which accounting standards used. B is correct under IAS but not under GAAP.
pdubyac sbakar, it's because no gain can be recognized immediately under either, not that there is another type of lease.
-The gain is deferred over the lease term, in proportion to rental payments, for an operating lease.
-The gain is deferred over the life of the asset, in proportion to depreciation expense, for a capital lease.

For the record, I had chosen 'B' as well.
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