Question

On January 1, Year 1, Alla Co. sold a property to Mish Co. for $400,000 and simultaneously leased it back for 3 years. The carrying amount of the property was $280,000, and its fair value was $310,000. The leaseback was properly classified as an operating lease. What amount of gain on sale of the property was recognized by Alla on January 1, Year 1

Answer 1

Answer: $30,000

Explanation:

In accounting, the treatment of the Sale and Operating Leaseback operation is such that a gain is only recognized if the sales price is more than the fair value. In such a case the difference between the fair value and the carrying price is considered the Gain on Sale.

The Difference between the sales price and the fair value is to be amortized over the period of use.

Seeing as the selling price is more than the fair value, the Gain on Sale is therefore,

= Fair Value - Carrying Value

= 310,000 - 280,000

= $30,000

$30,000 is the amount of gain on sale of the property recognized by Alla on January 1, Year 1.