JARD-REF3-L-SALESLEASEBACK

ACCOUNTING FOR SALES AND LEASEBACK TRANSACTIONS

A transaction where the owner of a property sells the property
and then immediately leases all or part of it back from the new
owner.

Case 1
On January 1 2013, German sold an equipment to Sterling for
P1,100,000 which is the fair value of the equipment. The
equipment had a cost of P2,500,000, carrying amount of
P1,000,000 and remaining useful life of 10 years.

LEASEBACK RESULTING TO A FINANCE LEASE

Any excess of the sales proceeds over the carrying amount
of the asset is amortized and deferred over the lease
term.
Any excess of the carrying amount of the asset over the
sales proceeds is recognized immediately.

On the same day, German leased back the equipment for 5

years for an annual rental of P40,000 payable at the beginning
of each year. German has no option to renew or repurchase the
equipment.

Cash
Accumulated Depreciation
Loss on Sale-Leaseback*
Asset
Deferred Gain on Sale-Leaseback*

Case 2
Cuba owns a building costing P5,000,000 with P3,400,000 of
accumulated depreciation and fair value of P2,800,000. The
building has a remaining useful life of 15 years.

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LEASEBACK RESULTING TO AN OPERATING LEASE

If the leaseback transaction is established at fair value,
there is in effect a normal sale transaction. Any profit or
loss is recognized immediately.
If the leaseback transaction is established at above fair
value, excess of the sales price over the fair value is
deferred and amortized while excess of the fair value over
the carrying amount is recognized immediately.
Cash
Accumulated Depreciation
Asset
Gain on Sale
Unearned Gain on Sale-Leaseback

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On January 1, 2013, the building is sold to Mexico for

P2,415,000 and leased back over a 10-year term, with lease
payment of P500,000 to be made at the end of each year.
The interest rate implicit is approximately 16%.
Case 3
On January 1, 2013, Legend sold machinery costing P600,000
with an accumulated depreciation of P250,000 for P807,640,
which is also its fair value. The remaining life of the machine is
five years. Legend immediately leased the machine back for
P200,000 yearly, payable in advance. The implicit interest rate
is 12%.
a) Deferred gain on January 1, 2013
b) Depreciation expense for the leased asset for 2013
c) Interest expense for 2013
d) Revenue on sale-leaseback for 2013

If the leaseback transaction is established at below fair

value, any profit or loss on the transaction is immediately
recognized unless the loss is compensated by future
rentals below fair market value, in which case, the loss is
deferred and amortized in proportion to the rental
payments over the period the asset is used.
Cash
xx
Accumulated Depreciation
xx
Loss on Sale*
xx
Deferred Loss on Sale-Leaseback**
xx
Asset
xx
** = loss is compensated by rentals below market value

-ADAMSON UNIVERSITY-

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