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Hi Mike,
Can I ask your comments on sale and leaseback illustration in your course notes?
I cannot understand the second example, where SP is 8600$, CV is 8000$ and FV is 9000$. It is clear, that profit of SP – CV = 600$ can be recognized immediately. But what is meant by comment “if low rentals negotiated, the FV excess over SP is automatically spread over the 4 year rental period”? How can we arrive at 400$ loss?
Thank you in advance,
SanitaHi Sanita
It isn’t a loss because fair value was never recorded in the books.
We MAY have been able to sell for $9,000 but there’s no certainty behind that possibility. As it is, we said to the purchaser “Look, pal, you’re getting a good asset here and you’re guaranteed an income over the next few years. What about we let you have it for $8,600 but, instead of you charging us the going rate, you let us have it for reduced rentals?”
We potentially COULD have made an instant profit but, as it is, we’re reducing our expenses over the lease period
Ok?
Thanks, Mike,
So the only entry is recognition of profit 600$.
And that potential profit of 400$ is reflected in our books by reduced rentals.Correct – we could (presumably) have made the profit by selling at fair value but then the expenses over 4 years would have been higher
By selling at a lower value and negotiating reduced annual rentals we automatically spread the benefit foregone by lowering the annual expense
Ok?
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