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Lease 5. Sales and Leaseback
Lease 5. Sales and Leaseback
10 - 1
Definition
A sale and leaseback is an arrangement
whereby one party sells an asset to
another party and then immediately leases
the asset back from the new owner.
Seller becomes a seller-lessee
Buyer becomes a buyer-lessor
Illustration: Sales price at FV
On January 1, 2017, an entity sold an equipment with
remaining life of 10 years and immediately leased it back for 4
years at the prevailing market rental.
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
PVOA 1 at 10% for four periods 3.170
Compute for:
a. Lease liability
b. Right of use asset
c. Gain or loss to be recognized
Lease Liability
Present value of rentals
(800,000 x 3.17) 2,536,000
Right of use asset
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000
PV of rentals 6,318,000
Additional financing equal to excess FV (2,000,000)
PV related to lease liability 4,318,000
PV of rentals 3,593,700
Additional financing equal to excess FV 500,000
PV related to lease liability 4,093,700