Question
Wilson Transport Company Sale-Leaseback You are the financial controller for Wilson Transport Company and have been approached by the company president, Mr. John Woo, who
Wilson Transport Company
Sale-Leaseback
You are the financial controller for Wilson Transport Company and have been approached by the company president, Mr. John Woo, who has heard that a company can profit and increase cash flow by a device known as a sale-leaseback. Your company recently purchased 20 new tractor-trailers, and the president thinks that Wilson would be better off by selling the tractor-trailers and leasing them back over their useful lives. In fact, Mr. Woo is now negotiating a financing deal with a group of investors whereby Wilson can sell its 20 tractor-trailers for $10,000,000 and immediately lease them back, recognizing a $1,000,000 profit on the sale. After hearing the details of the transaction, you tell Mr. Woo that the company must defer recognizing the gain immediately and instead recognize it piecemeal over the term of the lease agreement.
Discussion Questions
Answer each of the following questions presented to you by the president.
1. I am not very familiar with lease accounting. What is the nature of a sale-leaseback transaction?
2. What difference does it make if Wilson leases the tractor-trailers back or not? Should the sale and the lease be treated as two separate transactions?
3. Under what circumstances, if any, must Wilson report the tractor-trailers and the related lease obligation on a sale-leaseback on its financial statements?
Step by Step Solution
3.39 Rating (155 Votes )
There are 3 Steps involved in it
Step: 1
1A saleleaseback occurs when a firm sells an asset such as equipment or real estate and immediately leases it back from the buyer The company recogniz...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started