Question

The following are four independent situations.

(a) On December 31, 2017, Zarle Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was \(520,000, its carrying amount is \)400,000, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017.

Short answer

The deferred amount on 12/31/2017 is $120,000.

Step-by-step solution

Meaning of Selling price

The selling price is the agreed price for the underlying goods and services involved in the sale made by a person or company to another person or company.

Determining the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2017

Revenue to be reported from the sale of the computer equipment on December 31, 2017. Any sale profit is deferred and amortized throughout the lease period (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee).

In this case, the lease qualifies as a capital lease since the lease period (10 years) represents 83 percent of the leased property's remaining economic life (12 years).

As a result, on 12/31/17, the whole $120,000 gain ($520,000 – $400,000) would be deferred and amortized over ten years. There is no amortization for 2017 because the transaction occurred on December 31, 2017.