A Sale and Leaseback Arrangement May Involve an Operating Lease

question 58

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 statement of comprehensive income 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.

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Definitions:

Insurance Policy

A contract between an insurer and a policyholder that defines the terms under which the insurer agrees to indemnify the policyholder against losses, damages, or liabilities arising from certain events.

Estimable Credit Company

A reputable financial organization known for providing reliable credit services to its customers.

Fire Insurance Policy

A contract between an insurer and policyholder that provides financial protection against losses or damage due to fire.

Unoccupied

Referring to a place or dwelling that is not currently being lived in or used.