Question

On December 31, 2021, Company A sold equipment to Company B and simultaneously leased it back for one year. The sales price for the equipment was $497. The carrying amount of the equipment was $443. The present value of the lease payments ($4,000 for 12 months at 6%) is $46,708. The equipment has an estimated remaining useful life of ten years. In Company A's December 31, 2021, income statement, the gain from the sale of this machine should be

Answer 1

Gain from the sale of this machine = $54

Step-by-step explanation:

Sales price for the equipment = $497

Carrying amount of the equipment = $443

Lease term = 1 year

Estimated remaining useful life = 10 years

This is a type of Sale and lease back transaction. It is not a capital lease as the lease term (1 year) is not for the major period of remaining useful life (10 years) of equipment. No consideration will be given to annual lease payment and all the gain will be recognized immediately without deferment.

Gain from the sale of this machine = Sales price for the equipment - Carrying amount of the equipment

= $497 - $443

= $54.