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on 1jan 20X5 blocks co entered in to new lease agreements as follows
agreement 3 : this sale and lease back relates to a cutting machine purchased by blocks co several years ago , whose carrying amount on 31st dec 20X4 was $250000 . on january 20X5 , it was sold to cogs co for $500000 and blocks co will lease the machine back for 5 years , present value of minimum lease payments is $350000 for agreement what should be the profit recognized for the year ended 31st dec 20X5 as a result of sale and lease back
A $100000 B $250000 C $75000 D $ 150000
my ans c bcs DR cash $500000
DR right to use $175000
CR asset 250000
CR lease payment 350000
CR gain 75000
Sir but ans says option BI don’t understand your entry Dr right to use $175,000
Where’s that from?
its said in sale and lease back that if it qualifies as sale then seller – lessee must measure the right of use asset as a proportion of the previous carrying amount
I don’t think that that’s a correct interpretation of the proportional rule
My interpretation is, where only part of an asset is sold and leased back, that’s the occasion for proportional measurement
I need to read the IFRS again because I’m surprised that the full $250,000 gain on sale is recognized even though the sale value is clearly substantially greater than its fair value
I would have thought that the $150,000 excess over present value would be spread over the 5 years
But even that’s only on condition that the arrangement qualifies as a lease! The present value of the minimum lease payments doesn’t satisfy the “substantially the same value” requirement of the lease agreement
Does the answer not explain how they have arrived at $250,000?
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