#conceptual #numerical this question is related to Accounting & Reporting or Accounting for sale and leaseback ....
Question:
#conceptual #numerical this question is related to Accounting & Reporting or Accounting for sale and leaseback .
Question
Snack That Sale and Leaseback
Snack That Inc. ("Snack That") is a snack food and bakery product company with a large
manufacturing and distribution facility in Evansville, Indiana. Snack That frequently sends
employees from its smaller manufacturing and distribution facilities to Evansville for training
opportunities, as well as employees from its corporate office to perform quality checks and test
controls.
To manage travel expenses for hotel and vehicle rentals, Snack That owns a corporate housing
facility and shuttle to lodge and transport its employees to and from the manufacturing and
distribution facility.
In 2018, Snack That launched a corporate initiative to free up cash to fund a new snack product
line. As a result, on July 1, 2018, Snack That entered into a sale-and-leaseback arrangement with
Rent That Inc. ("Rent That") for both its corporate housing facility and its shuttle. Assume the
agreement meets the definition of a contract under ASC 606-10-25-1 through 25-8 and that
certain of the indicators related to the transfer of control of a point-in-time performance
obligation (i.e., the housing facility and the shuttle being transferred from Snack That to Rent
That) in ASC 606-10-25-30 have been met. Further assume that the inception of the contract and
the commencement of the lease are both on July 1, 2018. Note that the Company adopted ASC
842 prior to July 1, 2018.
Key facts related to sale-and-leaseback transactions are as follows:
? Corporate housing facility:
o
Carrying amount of the asset ? $600,000.
o
Fair value of the asset ? $900,000.
o
Remaining economic life of the asset ? 28 years.
o
Sales price of asset ? $900,000.
o
The lease term is 10 years and there are no options to renew.
o
The lease payments are paid annually and are fixed at $70,000 per year.
o
The present value of the lease payments is based on Snack That's incremental
borrowing rate and equals $540,521.
o
Ownership does not transfer to Snack That at the end of the lease.
o
The agreement contains an option for Snack That to repurchase the housing
facility at the end of the lease term for the then fair market value. At lease
commencement, Snack That concludes that exercise of the purchase option is not
reasonably certain.
o
The facility is not specialized and will have alternative use to Rent That at the end
of the lease.
Case 5c: Snack That
Page 2
o
There are many corporate housing facilities in the area that frequently come up
for sale.
? Shuttle:
o
Carrying amount of the asset ? $40,000.
o
Fair value of the asset ? $50,000.
o
Remaining economic life of the asset ? 8 years.
o
Sales price of the asset ? $50,000.
o
The lease term is 7 years with no renewal options.
o
The lease payments are paid annually at a fixed amount of $7,000 per year.
o
The present value of minimum lease payments based on Snack That's incremental
borrowing rate and equals $40,504.
o
Ownership does not transfer to Snack That at the end of the lease.
o
The shuttle is not specialized and will have alternative use to Rent That at the end
of the lease.
o
Snack That has an option to repurchase the shuttle at the end of the lease for the
then fair market value. At lease commencement, Snack That concludes that
exercise of the purchase option is not reasonably certain.
o
There are many similar shuttles that are readily available in the marketplace.
Required:
1. How much gain on derecognition of the corporate housing facility should Snack That, as
seller-lessee, recognize as a result of the sale?
2. How much gain on derecognition of the shuttle should Snack That, as seller-lessee,
recognize as a result of the sale?
3. How should Rent That, as buyer-lessor, account for the purchase of the corporate housing
facility and shuttle?
detail is attached in the picture.
Expert Answer:
