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On 1 January 20X4, Stark entered into a sale and leaseback of its property. When it was sold,
the asset had a carrying amount of $6 million and a remaining life of 10 years Stark sold the
asset for $7 million and leased it back on a 10 year lease, paying $1 million on 31 December
each year. The lease carried an implicit interest rate of 7%.
What is the total expense that should be recorded in the statement of profit or loss for the
year ended 31 December 20X4?
why in this question,payment for 1 million $ is not recognized in Profit/Loss statement?
Although the asset is “sold” it is still effectively our asset when we lease it back and so the proceeds are treated as a loan. The $1 million payment is the re-payment of the loan and reduces the outstanding liability and is not expensed through profit or loss.