General Tools is seeking ways to maintain and improve cash balances. As company controller, you have proposed the sale and leaseback of much of the company's equipment. As seller-lessee, General Tools would retain the right to essentially all of the remaining use of the equipment. The term of the lease would be six years. A gain would result on the sale portion of the transaction. The lease portion would be classified appropriately as a capital lease. You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn't understand the way you will account for the transaction. I really had counted on that gain to bolster this period's earnings. What gives? he wondered. Put it in a memo, will you? I'm having trouble following what you're saying to me.

Required: Write a memo to your CFO. Include discussion of each of these points:

How the sale portion of the sale-leaseback transaction should be accounted for at the lease's inception.

How the gain on the sale portion of the sale-leaseback transaction should be accounted for during the lease.

How the leaseback portion of the sale-leaseback transaction should be accounted for at the lease's inception. The conceptual basis for capitalizing certain long-term leases.