On December 31, 2017, Sheffield Co. sold a machine to Cross Co. and simultaneous
ID: 2527758 • Letter: O
Question
On December 31, 2017, Sheffield Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $484,700, the carrying amount is $417,700, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $34,700. At December 31, 2017, how much should Sheffield report as deferred revenue from the sale of the machine?
$________________________
On January 1, 2017, Tamarisk Corp. sold an airplane with an estimated useful life of 10 years. At the same time, Tamarisk leased back the plane for 10 years. The sales price of the airplane was $500,500, the carrying amount $378,400, and the annual rental $74,204. Tamarisk Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. How much gain on the sale should be reported at the end of 2017 in the financial statements
The gain on the sale should be reported $____________________
The amount of deferred revenue to be reportedExplanation / Answer
A) A sale lease back is usually treated as a single financing transaction in which any profit on the sale is deferred and amortized by the seller. But this rule is amended by FASB 28 when either only a minor part of the remaining use of the property is retained, or more than a minor part but less than substantially all of the remaining use of property is retained. One situation is, when the present value of the lease payments is 10% or less of the fair value of the sale lease back property
In this case too the present value of the lease payments $34700 is less than 10% of fair value the asset ( $484700)
Under these circumstances sale and lease back are accounted for as separate transactions. Therefore the full gain or loss is recognized. ($484700-$417700)= $67000
B)The profit on the sale of $ 122100($500500-$378400) should be deferred and amortized over the period of lease term. As the lease asset is being depreciated uing the sum-of-the-year's-digits method, the deferred gain should also be reported in the same manner. Therefore the gain recognition in the first year 2017 is $22200
(122100*10/55)
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