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in the Kaplan it states that for sale and finance leaseback ( Operating lease) the income is recognized immediately, I don’t understand how in the 6/10 Holcombe paper we deferred the income over 5 years, I thought the concept was the fact that it is recognized immediately rather than deferring
6/12- William
sale $5 FV $5 CV$3.5 for term of 5 years
sale and leaseback for fin lease
in Kaplan it states for sale and leaseback for fin lease, the deferred income is release to p/l over the lease term so should we not dr deferred income $1.5/5= 0.3 and CR deferred income $0.3? but in solutions I don’t appear to see this calculation?thank you
Hi, in line 1 of your post, you talk about a “finance leaseback (operating lease)” Now that has me confused! Is it a lease back under an operating lease or is it a lease back under a finance lease?
If it’s under an operating lease, the asset is no longer ours and nor do we pretend that it’s ours as we would if it were a finance lease.
So recognise gain (fair value > carrying value)
In all cases, if fair value < carrying value, recognise that loss immediately
In your William question, you have again confused me! The entry you propose is Dr Deferred Income and Cr Deferred Income!
Page 91 and 92 of the free course notes on this site, I think, explain the position for Holcombe (sale and operating lease back) although you have given me no values to relate to and, in particular, where sale price and fair value are the same, we recognise any profit (sale price > carrying value) immediately
The top of page 91 in the course notes refers to sale and lease back under a finance lease – the William situation – where the double entry to record the sale and lease back under finance lease is Dr Cash and Cr Obligations under Finance Lease Account
The effect of that entry is to defer automatically the gain and spread it over the lease term
Check out pages 91 and 92 in the course notes
OK?
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