On December 31, 2018, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B's December 31, 2018, balance sheet, the recognized gain from the sale of this machine should be:

Question

On December 31, 2018, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows:   In B's December 31, 2018, balance sheet, the recognized gain from the sale of this machine should be:

Quizplus · Accepted Answer

The leaseback is an operating lease because the only criteria provided for classifying the lease are the lease term and remaining life: since the lease term is one year of the 12-year remaining life of the asset, this is not a "major part" of the remaining life. The sale-leaseback approach is allowed only if the leaseback qualifies as an operating lease. Thus, B will record the sale of the asset and recognize the gain on the sale.