Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as
A) operating income.
B) an extraordinary item, net of income tax.
C) a separate component of stockholders' equity.
D) a deferred gain.

Question

Quizplus · Accepted Answer

The gain on the sale of the building should be deferred and recognized as income over the term of the lease. This is because the sale and leaseback transaction is essentially a financing arrangement, where the seller is obtaining cash by pledging the building as collateral. As such, the gain should not be recognized immediately as operating income or an extraordinary item. It also should not be reported as a separate component of stockholders' equity, as this is not a comprehensive income transaction.

Jamar Co Sold Its Headquarters Building at a Gain, and Simultaneously