Question

The following are four independent situations.

(d) On January 1, 2017, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was \(212,700, the carrying amount is \)300,000, the monthly rental under the lease is \(6,000, and the present value of the rental payments is \)115,753. For the year ended December 31, 2017, determine which items would be reported on its income statement for the sale-leaseback transaction.

Short answer

Sundgeroth should report a loss of $87,300.

Step-by-step solution

Meaning of Leaseback

Aleaseback is an agreement in which a firm sells the asset while obtaining a long-term leasefrom the buyer for the continued use of that underlying asset. It is a process that involves selling an item and then leasing a portion of that asset back to the seller for future use.

Determining the item that would be reported on its income statement for the sale-leaseback transaction

In this situation, Sondgeroth would record a loss of $87,300 ($300,000 - $212,700) for the difference between book value and less fair value. When the fair value of an asset is less than the book value (carrying amount), the profession demands that the loss be recognized immediately. In addition, a rent-charge of $72,000 (12 x $6,000) must be disclosed.