Seventh Canadian Edition
KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA
Northern Alberta Institute of Technology

15.
Describe the lessee’s accounting for saleleaseback transactions.
16.
Explain the classification and accounting treatment accorded leases that involve land as well as buildings and equipment.

• Transaction in which the property owner
(seller —lessee) sells the property to another party (purchaser —lessor) and simultaneously leases it back from the new owner
• Example: company buys land and constructs a building, sells it to a property investor and then leases it back

• If equipment purchase has already been financed, a sale-leaseback can allow the seller to refinance at lower rates (if rates have decreased)
• Can provide additional working capital when liquidity is tight

• If the lease meets one of the three capital lease criteria, lessee accounts for the transaction leaseback as a capital lease
• If the lease does not qualify as a capital lease, lessee accounts for the leaseback as an operating lease

• Any gains or losses on the sale of the property leased back are amortized over the lease term in proportion to the amortization of the leased assets (if a capital lease), or in proportion to the rental payments (if operating lease)
• If leased asset is land only, amortize straightline over the lease term

• If the lease meets one of the Group I criteria and both Group II, purchaser records the transaction as a purchase and a direct financing lease
• Otherwise, transaction is a purchase and an operating lease
• Criteria for sales-type lease would not be met in a sale-leaseback transaction

• On Jan 1, 2005 Lessee Inc. sells a used Boeing 747 with a cost of $85.5 million and a book value of $75.5 million to Lessor Inc for $80 million and immediately leases it back
• Conditions are:
– 15 year lease term with equal rental payments of
$10,487,443 at beginning of each year ( Table A-5; i=12%; n=15 )
– FV = $80 million on Jan 1/05 and 15 year economic life
– Lessee pays all executory cost
– Lessee amortizes similar owned assets straight-line over 15 years
– Annual payments assure Lessor 12% return which is also Lessee’s incremental borrowing rate

January 1, 2005: Sale of Aircraft to Lessor Inc.
Cash 80,000,000
Accumulated Amortization 10,000,000
Aircraft (net)
Unearned profit on
85,500,000
Sale-Leaseback 4,500,000
January 1, 2005: Leaseback transaction
Aircraft under Capital Lease 80,000,000
Obligations under
Capital Lease 80,000,000

January 1, 2005: First Lease Payment
Obligations under
Capital lease
10,487,443
Cash 10,487,433
2005 Executory Costs
Executory Costs
Cash or A/P
XXX
XXX

December 31, 2005: Amortization Expense
Amortization Expense 5,333,333
Accumulated Amortization 5,333,333
($80,000,000 / 15 years)
December 31, 2005: Amortization of Deferred Profit on
Sale –Leaseback
Unearned Profit on
Amortization expense
300,000 or Revenue 300,000
($4,500,000 / 15 years)

December 31, 2005: Interest Expense
Interest Expense
Interest Payable
8,341,507
8,341,507
[($80,000,000 - $10,487,443) x 12%]

January 1, 2005: Purchase of Aircraft from Lessee Inc.
Aircraft 80,000,000
Cash 80,000,000
January 1, 2005: Leaseback transaction
Lease Payments Receivable 157,311,645
Aircraft 80,000,000
Unearned Interest Revenue 77,311,645
($10,487,443 x 15 years = 157,311,645)

January 1, 2005: First Lease Payment
Cash
Lease Payments
Receivable
10,487,443
10,487,443
December 31, 2005: Interest Revenue
Unearned Interest Revenue 8,341,507
Interest Revenue 8,341.507

• Lessee has capital lease of land that will revert to lessor, if general rules followed:
– land recognized on balance sheet
– no amortization
– when lease term ends and land is returned:
Dr. Loss XXX
Cr. Land XXX
Therefore special rules needed

• In this situation, and only land is leased
– Treat as operating lease by lessee and lessor
• In this situation and land is minor part of leased property, do not separate out land value
• In this situation and land is significant part of leased property, land portion is treated as an operating lease

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