Arrochar Co is about to undertake a sale and leaseback arrangement, with ABC Co, on 1 January 20x8 in respect of an item of equipment, which has a remaining life of six years.

Arrochar Co will sell the asset at its fair value realising a profit of $400,000 and lease it for three years; ABC Co will take physical possession of the asset at the end of the lease contract.

Question:

Discuss how the sale and leaseback should be accounted for on 1 January 20x8.