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Hello,
On 1 January 20X5, Blocks Co entered into new lease agreements as follows:
This sale and leaseback relates to a cutting machine purchased by Blocks Co on 1 January 20X4 for $300,000. The carrying amount of the machine as at 31 December 20X4 was $250,000. On 1 January 20X5, it was sold to Cogs Co for $370,000 and Blocks Co will lease the machine back for five years, the remainder of its useful life, at $80,000 per annum.what profit should be recognised for the year ended 31 December 20X5 as a result of the sale and leaseback?
the answer : Profit on sale = 120,000 (370 – 250) spread over 5 yrs = $24,000
1)why the capital profits spread over the 5 years remaining asset life?
2)Where is the lease payment (rent) of $80,000.00, it is not included in the profit?Thanks
“what profit should be recognised for the year ended 31 December 20X5 as a result of the sale and leaseback?”
As a result of the sale and lease back there is a profit of $120,000 (there’s also finance costs within the $80,000 but that’s not as a result of the sale and leaseback)
Why spread the profit? Because ownership hasn’t changed and that profit of $120,000 is a contrived situation – why would the lessor pay so much for an asset with a carrying value of $250,000
Where assets are sold at a profit and immediately leased back under a finance lease, any profit on the sale shall be spread over the lease term or the remaining life of the asset, whichever is the shorter
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