ExpertHard2 marksMultiple Choice
ACCA · Question 05 · Leases
SECTION A
On 1 July 20X6, LogisticsPro Co entered into a sale and leaseback transaction for a fleet of delivery trucks. The trucks had a carrying amount of $2,000,000. They were sold to a finance company for their fair value of $3,000,000 and immediately leased back for 5 years. The transaction satisfies the requirements of IFRS 15 to be accounted for as a sale. The present value of the lease payments is $1,800,000.
What is the gain on rights transferred to the buyer-lessor to be recognized in profit or loss?
SECTION A
On 1 July 20X6, LogisticsPro Co entered into a sale and leaseback transaction for a fleet of delivery trucks. The trucks had a carrying amount of $2,000,000. They were sold to a finance company for their fair value of $3,000,000 and immediately leased back for 5 years. The transaction satisfies the requirements of IFRS 15 to be accounted for as a sale. The present value of the lease payments is $1,800,000.
What is the gain on rights transferred to the buyer-lessor to be recognized in profit or loss?
Answer options:
A.
$1,000,000
B.
$600,000
C.
$400,000
D.
$1,200,000
How to approach this question
1. Calculate total potential gain (Fair Value - Carrying Amount). 2. Determine the proportion of the asset retained (PV of lease payments / Fair Value). 3. Determine the proportion transferred (1 - proportion retained). 4. Multiply total gain by the proportion transferred to find the recognized gain.
Full Answer
C.$400,000✓ Correct
In a sale and leaseback qualifying as a sale under IFRS 15, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount retained. Consequently, only the gain or loss relating to the rights transferred to the buyer-lessor is recognized. Total gain = $1m. Rights retained = 1.8m / 3.0m = 60%. Rights transferred = 40%. Recognized gain = 40% * $1m = $400,000.
Common mistakes
Recognizing the full $1,000,000 gain, which was the old IAS 17 treatment for operating sale and leasebacks.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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