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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.
Required:
Memo to your CFO. Include discussion of each of these points:
Problem 1: How the sale portion of the sale-leaseback transaction should be accounted for at the lease's inception.
Problem 2: How the gain on the sale portion of the sale-leaseback transaction should be accounted for during the lease.
Problem 3: How the leaseback portion of the sale-leaseback transaction should be accounted for at the lease's inception.
Problem 4: The conceptual basis for capitalizing certain long-term leases.
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