Hi,

When it is a sales and lease back transactions,

It a sales and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognized as income by a seller-lesse. Instead, it shall be deferred and amortised over the lease term.


The entries are :

Example:
Terms =25 years
Book value of building = 25 m
Lease rental per annum = 1.1 m
Present value of minimum lease payments =15 m
Interest= 6

Dr Cr
Bank 25 m
Property 20 m
Deferred Income 5 m


Asset held under finance lease 15 m
Lease Obligation 15 m

Deferred Income 0.2 m
Income Statement 0.2 m

My questions:

Why is the excess part for sales price and carrying amount recorded as deferred income?

Thank you.

can u provide the question with the Fair Value of the asset at the date of sale and the Selling price pls...



i guess the reason to amortise the defer loss or income is to bring the rental to close to the mkt rental value... becos if the Sales price is roughly equal to the Fair value then no manipulation. but if the sales price is way off the fair value , something is wrong... either they try to push up this year profit or trying to lower future rental. so by spreading the abnormal gain or loss over the lease period it's simply bring the rental back close to mkt value. so manipulation is useless... hope i'm right..

Thanks a lot dear , I think you are right
please keep in toutch till I receive my study text (BPP on 31 /8/2008) I hope to be a good group P2 :shock:
my e-mail h.hafez23@gmail.com