A is corrent. According to ASC Topic 840, sale-leaseback transactions are treated as though two transactions were a single financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). Since this is a capital lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/Y1. At 12/31/Y1 an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x $50,000 = $5,000), because the lease covers 10 years. Therefore, the unearned gain at 12/31/Y1 is $45,000 ($50,000 – $5,000).
B is incorrect. According to ASC Topic 840, sale-leaseback transactions are treated as though two transactions were a single financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). Since this is a capital lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/Y1. At 12/31/Y1 an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x $50,000 = $5,000), because the lease covers 10 years. Therefore, the unearned gain at 12/31/Y1 is $45,000 ($50,000 – $5,000).
B is incorrect. According to ASC Topic 840, sale-leaseback transactions are treated as though two transactions were a single financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). Since this is a capital lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/Y1. At 12/31/Y1 an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x $50,000 = $5,000), because the lease covers 10 years. Therefore, the unearned gain at 12/31/Y1 is $45,000 ($50,000 – $5,000).
D is incorrect. According to ASC Topic 840, sale-leaseback transactions are treated as though two transactions were a single financing transaction, if the lease qualifies as a capital lease. Any gain on the sale is deferred and amortized over the lease term (if possession reverts to the lessor) or the economic life (if ownership transfers to the lessee). Since this is a capital lease, the entire gain ($150,000 – $100,000 = $50,000) is deferred at 1/1/Y1. At 12/31/Y1 an adjusting entry must be prepared to amortize 1/10 of the unearned gain (1/10 x $50,000 = $5,000), because the lease covers 10 years. Therefore, the unearned gain at 12/31/Y1 is $45,000 ($50,000 – $5,000).
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