On December 31, 2017, Lewis Ltd.sold a machine to Martin Inc.and simultaneously leased it back for one year.Pertinent information at this date follows: On Lewis's December 31, 2017 statement of financial position, the deferred profit from the sale of this machine should be reported as

Question

On December 31, 2017, Lewis Ltd.sold a machine to Martin Inc.and simultaneously leased it back for one year.Pertinent information at this date follows:  On Lewis's December 31, 2017 statement of financial position, the deferred profit from the sale of this machine should be reported as

Quizplus · Accepted Answer

The deferred profit on the sale of the machine is calculated as the difference between the sale price and the carrying value of the machine. From the information given, we know that Lewis Ltd. sold the machine to Martin Inc. and simultaneously leased it back for one year. This means that Lewis Ltd. is the lessor and Martin Inc. is the lessee. Since this is a sale-leaseback transaction, Lewis Ltd. would have received the fair value of the machine at the time of the sale, which is $85,000. The carrying value of the machine on Lewis's December 31, 2017 statement of financial position would have been its original cost of $70,000 less accumulated depreciation of $20,000, or $50,000. Therefore, the deferred profit on the sale is $85,000 - $50,000 = $35,000. However, since the leaseback is for one year, only one-twelfth (1/12) of the deferred profit should be recognized on Lewis's December 31, 2017 statement of financial position, which is $35,000 ÷ 12 = $2,917. This amount should be recognized as a liability on the statement of financial position, which is the opposite of deferred profit. Therefore, the deferred profit on the sale of the machine should be reported as $15,000 ($35,000 deferred profit minus $2,917 recognized as a liability). The correct answer is B, $15,000.