Daniel Ltd Sells One of Its Properties to a Financing

question 11

Multiple Choice

Daniel Ltd sells one of its properties to a financing company with an attached call option,which allows Daniel Ltd to reacquire the property at a future date for $400,000.The current market value at the time of the sale is $300,000,but the financing company pays $350,000 for it.It is expected that the market value of the property will exceed $400,000 before the option expires.What is the appropriate treatment of this sale?

• A) Record the revenue and make appropriate note disclosures about the call option and its associated risks.
• B) Set-off the call option and the building - reporting changes in the difference between their current values as revenues or expenses as appropriate.
• C) No entry would be required as the call option is off balance sheet and the building has not effectively been sold.
• D) Record the inflow of cash and a liability.
• E) None of the given answers.

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Definitions:

Financing Lease

A lease in which the lessee effectively acquires ownership of the leased asset. Also called a capital lease. Accounted for by showing the leased asset on the balance sheet offset by a liability representing the obligation to make future lease payments. Compare with Operating lease.

Balance Sheet

An accounting report displaying the financial condition of a business, including what it owns, owes, and the equity held by shareholders on a given date.

Leases

A contractual arrangement where a lessee (user) pays the lessor (owner) for the use of an asset for a specified period of time.

FASB

Financial Accounting Standards Board. The body within the accounting profession that sets rules and standards for the form and content of financial statements.