Question

The following are four independent situations.

On December 31, 2017, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was \(480,000, the carrying amount is \)420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $35,000. At December 31, 2017, how much should Wasicsko report as deferred revenue from the sale of the machine?

Short answer

Wasicsko should report $60,000.

Step-by-step solution

Meaning of Lessor

The person who gives the right to use the property or equipment for lease is known as the lessor. A lessor is the owner of the property. A lessee pays the amount of leased property in accordance with the lease agreement made between the lessor and the lessee.

Explaining the amount that Wasicsko should report as deferred revenue from the sale of the machine

A sale-leaseback transaction is often considered as a single financing transaction in which the seller defers and amortizes any profit on the sale.

However, the FASB modifies this general rule where only a small portion of the remaining use of the asset is retained or when more than a small portion but the remaining use of the asset is retained.

The first circumstance arises when the present value of the lease payment is 10% or less of the fair value of the sale-lease return asset. The second scenario is when the lease-back is more than marginal, but the capital for the entire asset sold does not match the terms of the lease.

Since this present value of lease payments ($35,000) is less than 10% of the property's fair value ($480,000), this problem is an example of the first situation. Under these terms, the sale and leaseback are treated as independent transactions. As a result, the entire profit ($480,000 - $420,000 = $60,000) is recognized.