CHAPTER 15: SALE AND LEASEBACK 12/31/2023 800,000 138,856 661,144 727,416

SALE AND LEASEBACK – An arrangement whereby one party sells 12/31/2024 800,000 72,584 727,416 -
an asset to another party, then immediately lease the asset back from
the new owner.
 The cost of right of use asset = (PV of lease liab/fair
 May occur when the seller-lessee is experiencing cash flow or
value) x carrying amount
financing problem or because there are tax advantages in
such an arrangement in the lessee’s jurisdiction. Cost of ROUA = (2,536,000/6,000,000) x 4,500,000 = 1,902,000
 There is a sale.
 There is a lease agreement for the same asset in which the
seller is the lessee and the buyer is the lessor.
Gain or loss to be recognized
Illustration – SALE PRICE AT FAIR VALUE
 Right retained by the seller-lessee is the proportion of
At the beginning of the current year, an entity sold a machinery with a the initial lease liab in relation to the fair value of asset.
remaining life of 10 years for P2,000,000 which is equal to the fair value  Gain or loss pertains to the right transferred to the
of the machinery. buyer-lessor is recognized.
 Right transferred to the buyer-lessor is the fair value of
The entity immediately leased the machinery back for 1 year at the asset minus the initial lease liab.
prevailing annual rental of P300,000.
Sales price at fair value 6,000,000
The machinery had a carrying amount of P1,800,000, net of
accumulated depreciation of P1,200,000. Carrying amount of equipment (4,500,000)
Books of seller-lessee Total gain 1,500,000
Cash 2,000,000 Fair value of equipment 6,000,000
Accumulated dep 1,200,000 Right retained by seller-lessee = lease liab (2,536,000)
Machinery 3,000,000 Right transferred to buyer-lessor 3,464,000
Gain on right transferred 200,000 Gain to be recognized = (3,464/6,000 x 1,500) 866,000
Rent expense 300,000 Gain not to be recognized = (2,536/6,000 x 1,500) 634,000
Cash 300,00 Total gain 1,500,000
Books of buyer-lessor

Machinery 2,000,000 Books of seller-lessee

Cash 2,000,000 Cash 6,000,000
Cash 100,000 Right of use asset 1,902,000
Rent income 100,000 Equipment 4,500,000
Depreciation 200,000 Lease liab 2,536,000
Accumulated dep (2M/10) 200,000 Gain on right transferred 866,000

Interest exp (2,536 x 10%) 253,000

Illustration – SALE PRICE AT FAIR VALUE Lease liab 546,400
On January 1, 2021, an entity sold equipment with remaining life of 10 Cash 800,000
years and immediately leased it back for 4 years at the prevailing market
rental. Depreciation (1,902/4 years) 475,500
Sales price at fair value 6,000,000 Accumulated dep 475,500
Carrying amount of equipment 4,500,000

Annual rental payable 800,000 Books of buyer-lessor

Implicit interest rate 10%  The buyer-lessor shall apply operating lease model bcs
the lease term is 4 years or only 40% of the useful life of
PV of O.A of 1 3.170 the underlying asset.
 The PV of rentals of P2,536,000 is <90% of FV of 6M
 The lease liab is measured at PV of rental payment.
Equipment 6,000,000
PV of rentals = 800,000 x 3.170 = 2,536,000
Cash 6,000,000
DATE PAYMENT INTEREST PRINCIPAL PV
Cash 800,000
1/1/2021 2,536,000
Rent income 800,000
12/31/2021 800,000 253,600 546,400 1,989,600
12/31/2022 800,000 198,960 601,040 1,388,560
Depreciation (6,000/10years) 600,000 Books of buyer-lessor

Accumulated dep 600,000 The annual rental is partly rental income and partly payment of the
financial asset.
Illustration – SALE PRICE ABOVE FAIR VALUE
PV FRACTION ALLOCATION
On January 1, 2021, an entity sold a building with remaining life of 20 Rent income 3,400,000 (3,400/5,400)x1,500 944,444
years and immediately leased it back for 5 years. Financial
2,000,000 (2,000/5,400)x1.500 555,556
asset
Sale price 20,000,000 Total PV 5,400,000 1,500,000
Fair value of building 18,000,000 Amortization related to financial asset

Carrying amount of building 10,800,000 DATE PAYMENT INTEREST PRINCIPAL PV

1/1/2021 2,000,000
Annual rental payable 1,500,000
12/31/2021 555,556 240,000 315,556 1,684,444
Implicit interest rate 12%
12/31/2022 555,556 202,133 353,423 1,331,021
PV of O.A of 1 at 5 periods 3.6 12/31/2023 555,556 159,723 395,833 935,188

Lease liab = 1,500,000 x 3.6 = 5,400,000 12/31/2024 555,556 112,223 443,333 491,854
12/31/2025 555,556 63,702 491,854 -
 Any excess sales price over FV shall be accounted for
as additional financing provided by the buyer-lessor to
seller-lessee. Building 18,000,000
Sales price 20,000,000 Financial asset 2,000,000
FV of building (18,000,000) Cash 20,000,000
Excess sale price over FV 2,000,000 Cash 944,444
PV of lease liab 5,400,000 Rent income 944,444
Additional financing (2,000,000) Cash 555,556
PV of lease liab related to rentals 3,400,000 Financial asset 315,556
Interest income 240,000
Cost of ROUA = 3,400,000/18,000,000 x 10,800,000 = 2,040,000

FV of building 18,000,000 Depreciation (18,000/20yrs) 900,000

Carrying amount of building (10,800,000) Accumulated dep 900,000

Adjusted total gain 7,200,000

FV of building 18,000,000 Illustration – SALE PRICE BELOW FAIR VALUE

Lease liab excluding excess (3,400,000) On January 1, 2021, an entity sold an equipment with remaining life of
8 years and leased it back for 5 years.
Right transferred 14,600,000
Sale price 5,000,000
Gain to be recognized (14,600/18,000 x 7,200) 5,840,000
Fair value of equipment 6,000,000
Gain not to be recognized (3,400/18,000 x 7,200) 1,360,000
Carrying amount of equipment 4,800,000
Adjusted total gain 7,200,000
Annual rental payable 900,000

Implicit interest rate 8%

Books of seller-lessee
PV of O.A of 1 for 5 periods 3.99
Cash 20,000,000
PV of rentals = 900,000 x 3.99 = 3,591,000
Right of use asset 2,040,000
DATE PAYMENT INTEREST PRINCIPAL PV
Building 10,800,000 1/1/2021 3,591,000
Lease liab 5,400,000 12/31/2021 900,000 287,280 612,720 2,978,280
12/31/2022 900,000 238,262 661,738 2,316,542
Gain on right transferred 5,840,000
12/31/2023 900,000 185,323 714,677 1,601,866
Interest exp (5,400 x 12%) 648,000 12/31/2024 900,000 128,149 771,851 830,015
Lease liab 852,000 12/31/2025 900,000 69,985 830,015 -

Cash 1,500,000  If the sale price is below FV, the difference is accounted
for as prepayment of rental.
Depreciation (2,040 x 5years) 408,000

Accumulated dep 408,000

FV of equipment 6,000,000 Implicit interest rate 8%

Sale price (5,000,000) PV of O.A of 1 for 3 periods 2.58

Excess FV over sale price 1,000,000 PV of rentals = 500,000 x 2.58 = 1,290,000

PV of rentals 3,591,000 DATE PAYMENT INTEREST PRINCIPAL PV

Excess FV – prepayment of rental 1,000,000 1/1/2021 1,290,000
12/31/2021 500,000 103,200 396,800 893,200
Totals lease liab 4,591,000
12/31/2022 500,000 71,456 428,544 464,656
Cost of ROUA = 4,591,000/6,000,000 x 4,800,000 = 3,672,800 12/31/2023 500,000 35,344 464,656 -

FV of equipment 6,000,000
Cost of ROUA = 1,290,000/10,000,000 x 12,000,000 = 1,548,000
Carrying amount of equipment (4,800,000)
Sales price 10,000,000
Total gain 1,200,000
Carrying amount (12,000,000)
FV of equipment 6,000,000
Total loss (2,000,000)
Lease liab including excess (4,591,000)
FV of building 10,000,000
Right transferred to buyer-lessor 1,409,000
Lease liab (1,290,000)
Gain to be realized (1,409/6,000 x 1,200) 281,800
Right transferred 8,710,000
Gain not be realized (4,591/6,000 x 1,200) 918,200
Loss to be recognized (8,710/10,000 x 2,000) 1,742,000
Total gain 1,200,000
Loss not to be recognized (1,290/10,000 x 2,000) 258,000

Total loss 2,000,000

Books of seller-lessee

Cash 5,000,000
Books of seller-lessee
Right of use asset 3,672,800
Cash 10,000,000
Equipment 4,800,000
Right of use asset 1,548,000
Lease liab 3,591,000
Loss on right transferred 1,742,000
Gain on right transferred 281,800
Building 12,000,000
Interest exp (3,591 x 8%) 287,000
Lease liab 1,290,000
Lease liab 612,720
Interest exp 103,200
Cash 900,000 Lease liab 396,800
Cash 500,000
Depreciation (3,672.8/5) 734,560
Depreciation (1,548/3) 516,000
Accumulated dep 734,560
Accumulated dep 516,000
Books of buyer-lessor
Books of buyer-lessor
Equipment 5,000,000
Building 10,000,000
Cash 5,000,000
Cash 10,000,000
Cash 900,000
Cash 500,000
Rent income 900,000
Rental income 500,000
Depreciation (5,000/8) 625,000
Depreciation (10,000/25) 400,000
Accumulated dep 625,000
Accumulated dep 400,000

 The seller-lessee shall continue to recognize the

Illustration – SALE PRICE AT FV WITH LOSS
transferred asset and recognize a finance liab equal to
On January 1, 2021, an entity sold a building with remaining life of 25 the transfer proceeds. (dr. cash | cr. Lease liab)
years and immediately leased it back for 3 years.  Part payment of II and part payment principal of
lease liab
Sales price at FV 10,000,000  The buyer-lessor shall not recognize the transferred
asset but shall recognize a financial asset. (dr. lease
Carrying amount 12,000,000 receivable | cr. Cash)
 Part collection of II and part collection of principal
Annual rental payable 500,000 lease liab.
PROBLEMS 1. Initial lease liab = 320,000
2. ROUA = 320,000/5,000,000 x 4,500,000 = 288,000
15-8 3. Annual dep of ROUA = 288,000/2 = 144,000
4. Gain on right transferred = 5,000,000 – 320,000 =
On December 31, 2021, Bain Company sold a machine to Ryan 4,680,000/5,000,000 x 500,000 = 468,000
Company and simultaneously leased it back for one year. 5,000,000 – 4,500,000 = 500,000
Sale price 360,000 15-15
Carrying amount 330,000 At the beginning of current year, Baker Company sold an equipment with
remaining useful life of 10yrs and immediately leased it back for 5yrs.
PV of lease rentals at 12% 341,000
Sale price at above FV 5,700,000
Estimated remaining useful life 12 years

Gain from the sale – 2021 = 360,000 – 330,000 = 30,000 Fair value 5,000,000

Carrying amount 4,500,000

15-12
Annual rental payable 500,000
At the beginning of current year, Easy Company sold an equipment with
remaining life of 10 years and immediately leased it back for 4 years at Implicit interest rate 10%
the prevailing market rental
PV of O.A of 1 at 5 periods 3.79
Sale price at fair value 8,000,000
1. Initial lease liab = 500,000 x 3.79 = 1,895,000
Carrying amount 6,000,000 2. ROUA = 1,195,000/5,000,000 x 4,500,000 = 1,075,500
5,700 – 5,000 = 700 | 1,895 – 700 = 1,195
Annual rental payable 1,000,000
3. Gain on right transferred B-L = 5,000,000 - 1,195,000 =
Implicit interest rate 10% 3,805,000/5,000,000 x 500,000 = 380,500
5,000 – 4,500 = 500
PV of O.A of 1 at 4 periods 3.17 4. Annual rental inc = 1,195,000/1,895,000 x 500,000 =
315,303
1. Initial lease liab = 1,000,000 x 3.17 = 3,170,000
2. Cost of ROUA = 3,170/8,000 x 6,000 = 2,377,500
3. Gain on right transferred = 8,000,000 – 3,170,000 =
4,830,000/8,000,000 x 2,000,000 = 1,207,000
8,000,000 – 6,000,000 = 2,000,000
4. Annual depreciation = 2,377,500/4 years = 594,375

15-13

At the beginning of current year, Judy Company sold a building with

remaining useful life of 30 years and immediately leased it back for 5yrs.

Sale price at below FV 18,000,000

Fair value of building 20,000,000

Carrying amount 24,000,000

Annual rental payable 1,000,000

Implicit interest rate 12%

PV of O.A of 1 at 5 periods 3.6

1. Initial lease liab = 1,000,000 x 3.6 = 3,600,000

2. ROUA = 5,600/20,000 x 24,000 = 6,720,000
20,000 – 18,000 = 2,000 | 3,600 + 2,000 = 5,600
3. Loss on right = 20,000 – 5,600 = 14,400/20,000 x 4,000 =
2,880,000
20,000 – 24,000 = (4,000)
4. Interest exp = 3,600,000 x 12% = 432,000
5. Net annual rent inc = 1,000,000 – 600,000 = 400,000
18,000/30 = 600

15-14

At the beginning of current year, Lee Company sold equipment to an

unaffiliated entity at the fair value of P5,000,000.

The equipment had a C.A of P4,500,000 and remaining life of 10yrs.

That same day, Lee Company leased back the equipment at P15,000
per month for 2yrs with no option to renew the lease or repurchase.

The PV of lease payments was P320,000 on the date od sale.