Reference no: EM133028957
Question - On January 1, 2021, Company A (CA) sold an asset to Company B (CB) and immediately leased it back.
Other information:
Lease contains no renewal options and the equipment reverts to CB at the end of the lease.
Present value of minimum lease payments is $ 2,500,000.
Sale price from CA to CB was $ 8,000,000.
The sale is considered valid under IFRS 15.
CA's carrying value of the asset was $ 5,000,000.
CA uses straight-line amortization for similar equipment that it owns.
Lease term is 6 years.
Economic life of asset is 10 years.
CA's fiscal year end is December 31, 2021.
Required -
1. What is the major economic reason for a sale leaseback?
2. What is the major accounting issue in recording a sale leaseback transaction?
3. Using IFRS, prepare the journal entry for CA at January 1, 2021. Explain your answer.
4. Using ASPE, prepare the journal entry for CA at January 1, 2021. Explain your answer.
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