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### Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

# The following are four independent situations.On December 31, 2017, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sales price of the machine was $480,000, the carrying amount is$420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one year is $35,000. At December 31, 2017, how much should Wasicsko report as deferred revenue from the sale of the machine? Wasicsko should report$60,000.

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## Meaning of Lessor

The person who gives the right to use the property or equipment for lease is known as the lessor. A lessor is the owner of the property. A lessee pays the amount of leased property in accordance with the lease agreement made between the lessor and the lessee.

## Explaining the amount that Wasicsko should report as deferred revenue from the sale of the machine

A sale-leaseback transaction is often considered as a single financing transaction in which the seller defers and amortizes any profit on the sale.

However, the FASB modifies this general rule where only a small portion of the remaining use of the asset is retained or when more than a small portion but the remaining use of the asset is retained.

The first circumstance arises when the present value of the lease payment is 10% or less of the fair value of the sale-lease return asset. The second scenario is when the lease-back is more than marginal, but the capital for the entire asset sold does not match the terms of the lease.

Since this present value of lease payments ($35,000) is less than 10% of the property's fair value ($480,000), this problem is an example of the first situation. Under these terms, the sale and leaseback are treated as independent transactions. As a result, the entire profit ($480,000 -$420,000 = \$60,000) is recognized.