Fellows help!
On December 31, 1992, Dirk Corp. sold Smith Co. two airplanes and simultaneously leased them back.
Additional information pertaining to the sale-leasebacks follows:
Plane #1 Plane #2
Sales price $600,000 $1,000,000
Carrying amount, 12/31/92 $100,000 $550,000
Remaining useful life, 12/31/92 10 years 35 years
Lease term 8 years 3 years
Annual lease payments $100,000 $200,000
In its December 31, 1992, balance sheet, what amount should Dirk report as deferred gain on these
transactions?
a. $950,000
b. $500,000
c. $450,000
d. $0
CPA-00414 Explananation:
Choice “b” is correct. Because no present value information is given, we must assume that the Plane 1
lease is “major.” It qualifies as a capital lease because it meets the 75% test (8 year term out of 10 year
life is 80%). In “major” sale-leasebacks, all gain is deferred. We must also assume that the Plane 2
lease is “minor” because it will be classified as an operating lease (it fails all “OWNS” tests we are able to
perform based on the given information). In “minor” sale-leasebacks, there is no deferral.
I answered A. 950,000. According to becker's lecture and the book shouldn't 950,000 rather than 500,000 be correct? I don't get the explained answer and how it goes into determining the deferral of gains on whether it is a capital or a an operating lease. The book and lecture tells us to evaluate the major/substantially all/minor of a leaseback by the pv of the lease payments. That being said the pv of the lease payments on plane #2 = 600,000(3*200,000), which means that it is under the “substantially all but greater than minor(10-90%)” under this rule we should defer the gain up to the pv of the leaseback(600,000). Therefore, since the gain on the leaseback is 450,000(1000,000 less 550,000) all of the 450,000 should be deferred (atleast thats how I see it). Hence, 450,000 + 500,000 = 950,000.
Can someone enlighten me??
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