On October 30, 2011, Truttman Corp. sold a five-year-old building with a carrying value of $10 million at its fair value of $13 million and leased it back. There was a gain on the sale. Truttman pays all insurance, maintenance, and taxes on the building. The lease provides for 20 equal annual payments, beginning October 30, 2011, with a present value
equal to 85% of the building’s fair value and sales price. The lease’s term is equal to 73% of the building’s useful life. There is no provision for Truttman to reacquire ownership of the building at the end of the lease term. Truttman has a December 31 year end.
Instructions
(a) Why would Truttman have entered into such an agreement?
(b) In reaching a decision on how to classify a lease, why is it important to compare the equipment’s fair value with the present value of the lease payments, and its useful life to the lease term? What does this information tell you under ASPE and IFRS?
(c) Assuming that Truttman would classify this as an operating lease, determine how the initial sale and the saleleaseback transaction would be reported under ASPE and IFRS for the 2011 year. What would be the implications if the selling price had been $14 million, $1 million greater than the fair value of the building?
(d) Assuming that Truttman would classify this as a finance lease, determine how the initial sale and the sale-leaseback transaction would be reported under ASPE and IFRS for the 2011 year.