Question

The city of Plainview sold its maintenance facility in an all-cash transaction and used the proceeds to improve the city’s financial position. The city then leased the building from the new owner on a non-cancellable basis. The city will be responsible for the maintenance and upkeep of the facility. These transactions illustrate:
A) both an operating lease and a sale and leaseback.

B) an operating lease.

C) a sale and leaseback.

D) a fully amortized lease.

E) a leveraged lease.

Answer 1

Answer:

The correct option is C,a sale and leaseback

Explanation:

A sale and leaseback is financing arrangement where the business owning an asset sells the asset for cash and leases back the asset in order to continue to benefit from its usage,a good question to ask would be ,what has happened in actual terms?

In clear terms,The City of Plainview has used its maintenance facility as collateral for a borrowing which is cash received in the sale and leaseback transaction.

In effect, a liability to the extent of the cash received should recorded,as this depicted the substance over form concept in accounting,where the true impact of transactions takes precedence its mere legal form