On January 1,2017,Sandy Inc.sold an office building to Bernie Capital for its fair value of $35,000,000 and immediately leased it back under a 20-year non-cancellable lease at $3,300,000 per year,payable at the beginning of each year.Dusty used an implicit rate of 8% to determine the lease payments,and this rate is known to Kara.The building had a carrying value of $14,000,000 on Kara's books and its remaining useful life is 20 years.Which of the following is correct?

Question

Quizplus · Accepted Answer

The fact that the lease is non-cancellable for 20 years, and that the lease payments cover substantially all of the building's remaining economic life suggest that this is a finance lease. Therefore, the seller-lessee should recognize a gain on the sale, but should amortize the gain over the lease term in proportion to the depreciation of the asset. Hence, option C is correct. Options A, B, and D are incorrect as the sale at fair value does not affect the classification of the lease, and the methodology for recognizing gain or loss is different for finance and operating leases.