Final answer:
A sale-leaseback is a financial transaction where an asset is sold and then leased back. It can result in a gain for the seller if the selling price is higher than the book value of the asset. If the book value is higher than the selling price, it results in a loss. Sometimes, the selling price may be intentionally lower to create artificial losses.
Step-by-step explanation:
A sale-leaseback is a financial transaction commonly used in business. It involves selling a property or asset and then leasing it back from the buyer. There are three major scenarios that can occur in a sale-leaseback:
- If the selling price is greater than the book value of the asset, it results in a gain for the seller. For example, if a company sells a building that is worth $1 million but has a book value of $800,000, the gain would be $200,000.
- If the book value of the asset is greater than the selling price, it results in a loss for the seller. This represents a real economic loss for the seller as they are selling the asset at a value lower than its book value.
- In some cases, the selling price of the asset may be artificially low compared to its fair value. This could be due to various reasons such as financial distress or strategic considerations. The seller may intentionally sell the asset at a lower price to create artificial losses for tax or accounting purposes.
In summary, a sale-leaseback involves selling an asset and leasing it back. The financial outcome depends on whether there is a gain, a loss (real economic loss), or artificially created losses.