(Sale-Leaseback) On January 1, 2007, Laura Dwyer Company sold equipment for cash and leased it back. As...
Question:
(Sale-Leaseback) On January 1, 2007, Laura Dwyer Company sold equipment for cash and leased it back. As seller-lessee, Laura Dwyer retained the right to substantially all of the remaining use of the equipment. The term of the lease is 8 years. There is a gain on the sale portion of the transaction. The lease por- tion of the transaction is classified appropriately as a capital lease. Instructions
(a) What is the theoretical basis for requiring lessees to capitalize certain long-term leases? Do not discuss the specific criteria for classifying a lease as a capital lease.
(b) (1) How should Laura Dwyer account for the sale portion of the sale-leaseback transaction at January 1, 2007? (2) How should Laura Dwyer account for the leaseback portion of the sale-leaseback transac- tion at January 1, 2007?
(c) How should Laura Dwyer account for the gain on the sale portion of the sale-leaseback transac- tion during the first year of the lease? Why?
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