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. |