On December 31, 2020, Lewis Ltd. sold a machine to Martin Inc. and simultaneously leased it back for one year. Pertinent information at this date follows: $\begin{array}{lccccc}
\text{ Sales price } .................................................................& \$ 180,000 \
\text{ Book value of machine } ..............................................& 165,000 \
\text{ Present value of reasonable lease rentals }.................. & \
\text{ (\$ 1,500 for 12 months @ 12\%) }................................& 16,883 \
\text{ Machine's estimated remaining useful life } ................ &\text{ 12 years } \

\end{array}$ On Lewis's December 31, 2020 statement of financial position, the deferred profit from the sale of this machine should be reported as

Question

On December 31, 2020, Lewis Ltd. sold a machine to Martin Inc. and simultaneously leased it back for one year. Pertinent information at this date follows: $\begin{array}{lccccc}
\text{  Sales price }  .................................................................& \$ 180,000 \
\text{  Book value of machine }  ..............................................& 165,000 \
\text{ Present value of reasonable lease rentals }..................  & \
\text{   (\$ 1,500 for 12 months @ 12\%)  }................................& 16,883 \
\text{ Machine's estimated remaining useful life } ................ &\text{   12 years }  \

\end{array}$ On Lewis's December 31, 2020 statement of financial position, the deferred profit from the sale of this machine should be reported as

Quizplus · Accepted Answer

When a company sells a machine and simultaneously leases it back, it is called a sale and leaseback transaction. In this transaction, the seller recognizes a gain or loss from the sale and defers it over the term of the lease. In this case, since the leaseback is for only one year, the entire profit from the sale should be deferred and amortized over that period.

The profit on the sale is calculated as follows:
Selling Price - Carrying Amount = Profit
$85,000 - $70,000 = $15,000

Therefore, the deferred profit from the sale of this machine should be reported as $15,000 on Lewis's December 31, 2020 statement of financial position. Choice B is the correct answer.

On December 31, 2020, Lewis Ltd On Lewis's December 31, 2020 Statement of Financial Position, the Martin