A Sale and Leaseback Arrangement May Involve an Operating Lease

question 37

Multiple Choice

A sale and leaseback arrangement may involve an operating lease where the benefits and risks of ownership have effectively passed to the lessor.In this situation if the sale is not made at the fair value of the asset,the appropriate treatment is to:

• A) Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term.
• B) Revalue the asset to fair value and in the case that the sale price is less than the fair value write-off the loss to the income statement in the period of the sale. In the case that the sale price is greater than the fair value, the profit should be deferred and amortised against the future rental payments.
• C) Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term.
• D) Write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is above fair value the excess of sales price over fair value must be deferred and amortised by the lessee in proportion to the rental payments over the lease term and write-down the asset to its fair value where the carrying value is greater than the fair value. Where the sale price is below fair value any profit or loss must be recognised immediately by the lessee except that, to the extent the loss is compensated by future rentals at below market price, it must be deferred and amortised in proportion to the rental payments over the lease term.
• E) None of the given answers.

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Definitions:

Axon

The long, slender projection of a neuron that conducts electrical impulses away from the neuron's cell body.

Dendrite

A branched extension of a neuron that receives electrical impulses from other nerve cells.

Myelin Sheath

An insulating layer, or sheath that forms around nerves, including those in the brain and spinal cord, made of protein and fatty substances, which allows electrical impulses to transmit quickly and efficiently along the nerve cells.

Absolute Refractory

A period immediately following the transmission of a nerve impulse when a neuron cannot be stimulated to transmit another impulse, regardless of the strength of the incoming signal.