Chapter 15

SALE AND LEASEBACK

Problem 15-1

On December 31, 2015, Bain Company sold a machine with 12-year useful life to another entity
and simultaneously leased it back for one year.

Sale Price 360,000

Carrying amount 330,000
Present value of reasonable lease rentals
(₱3,000 for 12 months @ 12%) 34,100

What revenue from the sale should be reported in 2015?

a) 34,100
b) 30,000
c) 4,100
d) 0

Problem 15-2

On December 31, 2015, Mae Company sold an equipment with useful life of 10 years and
simultaneously leased back the equipment for 2 years.

Sale price above fair value 7,500,000

Fair value of equipment on date of sale 6,000,000
Carrying amount 5,000,000

What amount of gain should be reported in 2015?

a) 2,500,000
b) 1,500,000
c) 1,000,000
d) 1,750,000

Problem 15-3

On December 31, 2015, Thunder Company sold land with a cost of ₱1,500,000 to Victoria
Company for ₱2,300,000 when the land’s fair value was ₱2,150,000. Thunder Company
immediately entered into a cancelable lease agreement to use the land for 2 years at an annual
rental of ₱20,000.

1) What amount of profit should Thunder record on the sale of land for 2015?
a) 150,000
b) 800,000
 c) 650,000
d) 725,000

2) What amount should be recognized as deferred gain on December 21, 2015?

a) 800,000
b) 650,000
c) 150,000
d) 400,000

Problem 15-4

On January 1, 2015, Juan Company sold a machine and immediately leased it back at an annual
rental that was determined to be sufficiently lower than the market rate. The details of the sale
and leaseback are as follows:

Sale price before fair value 5,000,000

Fair value of machine 6,500,000
Carrying amount of machine 7,000,000
Remaining life of machine 15 years
Lease term 5 years

What total amount of loss should recognized in the income statement for 2015?
a) 800,000
b) 500,000
c) 300,000
d) 400,000

Problem 15-5

On January 1, 2015, Pedro Company sold a machine and immediately leased it back at an
annual rental that was determined to be sufficiently lower than the market rate. The following
data relate to the sale and leaseback transaction:

Sale price before fair value 4,000,000

Fair value of machine 5,300,000
Carrying amount of machine 5,000,000
Remaining life of machine 10 years
Lease term 2 years

What total amount of loss should be recognized in the income statement for 2015?
a) 1,000,000
b) 1,300,000
c) 500,000
d) 650,000
Problem 15-6

On January 1, 2015, Tripoli Company sold a machine for ₱3,000,000. The fair value on the date
of sale was ₱4,200,000. The machine had a carrying amount of ₱4,000,000 and remaining life of
10 years.

The entity immediately leased back the machine at an annual rent of ₱60,000 for four years. It
was determined that the annual rental is sufficiently lower compared to the market rent of a
similar asset.

What total amount should be recognized in profit or loss for 2015?

a) 250,000
b) 310,000
c) 300,000
d) 360,000

Problem 15-7 (IFRS)

On December 31, 2015, Hazel Company sold an equipment with remaining life of 12 years for
₱4,600,000. The entity immediately leased the equipment back for 3 years at an annual rent of
₱90,000. The carrying amount of the equipment was ₱3,500,000 and the fair value was
₱4,300,000.

What amount should be recognized as deferred gain on sale and leaseback on December 31,
2015?
a) 800,000
b) 500,000
c) 300,000
d) 0

Problem 15-8 (AICPA Adapted)

On June 30, 2015, Lee Company sold an equipment for ₱5,500,000. The equipment had a
carrying amount of ₱5,000,000 and a remaining life of 10 years. That same day, the entity
leased back the equipment at ₱15,000 per month for 2 years with no option to renew the lease
or repurchase the equipment. The present value of the lease payments using the appropriate
interest rate was ₱318,650 on June 30, 2015.

What is the rent expense for the year ended December 31, 2015?
a) 110,000
b) 90,000
c) 50,000
d) 40,000
Problem 15-9 (IAA)

On June 30, 2015, Pam Company sold equipment for ₱3,500,000. The equipment had a carrying
amount of ₱3,150,000 and a remaining useful life of 10 years. That same day, the entity leased
back the equipment at ₱35,000 per month for 5 years with no option to renew the lease or
repurchase the equipment.

What amount should be reported as rent expense for 2015?

a) 420,000
b) 210,000
c) 175,000
d) 140,000

Problem 15-10 (AICPA Adapted)

On January 1, 2015, Hooks Oil Company sold equipment with a carrying amount of ₱1,000,000
and a remaining useful life of 10 years to Maco Drilling for ₱1,500,000. Hooks immediately
leased the equipment back under a 10-year finance lease with a present value of ₱1,500,000
and will depreciate the equipment using the straight line method. Hooks made the first annual
lease payment of ₱244,120 on December 31, 2015. The implicit interest rate in the lease is 10%.

In Hooks’ December 31, 2015 statement of financial position, what amount should be reported
as unearned gain on equipment sale?
a) 500,000
b) 450,000
c) 255,880
d) 0

Problem 15-11 (PHILCPA Adapted)

On December 31, 2015, Albocasser Company purchased a tractor from Cheliff Company.
Simultaneous with the sale. Cheliff leased back the tractor for 12 years for use in the new farm
that it is developing. The sale price of the tractor was ₱7,800,000, while the carrying amount in
the books of Cheliff on the date of the sale was ₱5,850,000.

Cheliff’s engineers have estimated that the remaining economic life of the tractor is 15 years.
Cheliff is a wholly-owned subsidiary of a US entity. It is required to follow US generally accepted
accounting principles in the reporting package for consolidation.

What is the amount that Cheliff should report as deferred gain from the sale of the tractor on
December 31, 2015?
a) 1,950,000
b) 1,820,000
c) 1,787,000
 d) 0

Problem 15-12 (IAA)

On January 1, 2015, Baker Company sold the equipment to an unaffiliated entity for
₱5,700,000. The equipment had a carrying amount of ₱4,500,000 and a remaining life of five
years. On the same date, the entity leased back the equipment at ₱1,350,000 per year payable
in advance for a 5-year period. The lessor’s implicit interest rate in the lease is 10 % . The entity
used the double declining balance method of depreciation.

What is the unearned income on the sale and the leaseback in December 31, 2015?
a) 1,200,000
b) 960,000
c) 720,000
d) 0

Problem 15-13 (IAA)

On January 1, 2015, Accord Company sold a building with a carrying amount of ₱4,200,000 to
another entity for ₱4,050,000. The entity immediately entered into a leasing agreement
wherein it would lease the building back for an annual payment of ₱640,000. The term of the
lease is 10 years, the expected remaining useful life of the building. The first annual lease
payment is to be made on January 1 of each succeeding year. The lessor’s implicit interest rate
is 12%.

What amount of loss on sale and leaseback should be recognized for 2015?
a) 150,000
b) 135,000
c) 15,000
d) 0

Problem 15-14 (IFRS)

Sensible Company sold an item of plant and machinery on January 1, 2015 for ₱2,500,000
which is equal to fair value. The carrying amount of the asset was ₱2,000,000. The entity leased
the item back on that date for remaining useful life of 5 years. Lease payments are ₱700,000 on
January 1 each year.

1) What is the gain on disposal to be recognized for 2015?

a) 500,000
b) 100,000
c) 250,000
d) 0
2) What is the total finance charge over the lease term?
a) 1,500,000
b) 1,000,000
c) 500,000
d) 0

Problem 15-15 (IFRS)

In an attempt to alleviate liquidity problems, Banco Company entered into an agreement on

January 1, 2015 to sell the processing plant to another entity for ₱3,500,000 which is the fair
value of the plant. At the date of sale, the plant had a carrying amount of ₱2,750,000. The
entity immediately leased the processing plant back from the buyer. The terms of the lease
agreement were:

Annual payment in arrears, commencing

December 31, 2015 700,000
Reimbursement to the 5essor for maintenance cost
included in the annual payment 35,000
Lease term 6 years
Economic life of plant 8 years

1) What is the deferred gain on the sale and leaseback on December 31, 2015?
a) 750,000
b) 625,000
c) 656,000
d) 0
2) What is the total finance charge over the lease term?
a) 1,240,000
b) 1,820,000
c) 700,000
d) 490,000

Problem 15-16 (IAA)

On January 1, 2015, Halo Company sold a computer system to Lark Company for ₱2,550,000
and immediately leased the computer system back. The computer was carried on Halo’s books
at an amount of ₱2,250,000. The term of the noncancelable lease is 10 years and title will
transfer to Halo at the end of the lease term. The lease agreement required equal to rental
payments of ₱415,000 at the end of each year.

The incremental borrowing rate of Halo is 12% but Halo is aware that Lark set the annual rental
to ensure a rate of return of 10%.
The computer has a fair value of ₱2,550,000 on January 1, 2015 and an estimated economic life
of 12 years. Halo paid executor cost of ₱45,000 for the current year.

Which of the following would be recorded by Halo on December 31, 2015?

a) Debit leased computer ₱2,550,000
b) Credit deferred gain ₱300,000
c) Debit deferred gain ₱25,000
d) Debit deferred gain ₱30,000

Warren C. Maniacup