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CPAhamster
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Joined: 24 Oct 2009
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Posted: 23 Nov 2009 at 04:24 \| IP Logged

Able sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of sale, the gain should be reported as....

An asset valuation allowance

I got confused why we have to report it as an asset valuation allowance. Please help, can't figure out what is asset valuation allowance

Thank you in advance

maricata
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Joined: 19 Jun 2009
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Posted: 23 Nov 2009 at 16:09 \| IP Logged

CPAhamster wrote:

Able sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of sale, the gain should be reported as....

An asset valuation allowance

I got confused why we have to report it as an asset valuation allowance. Please help, can't figure out what is asset valuation allowance

Thank you in advance

Are you using Becker?

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lovethepirk
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Joined: 10 Jul 2009
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Posted: 23 Nov 2009 at 16:41 \| IP Logged

I don't think that is correct.

Example should clear it up for you:
Asset sold for 100,000 or FMV
Book value is 80,000

Cash...........100,000
    Asset.........................80,000
    Unearned Gain..............20,000

Leased Asset......100,000
   Lease Liability.................100,000

It is a capital lease so you extend that gain over course of lease life. We do this by removing the liability which is "unearned gain" and also reduce 'Depreciation expense'.

Reducing Depreciation expense will increase earnings each period as we transfer that gain into earnings each year.

Unearned Gain..............xxxx
   Depr ex..................................xxxx

there is no asset valuation here

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joecjr
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Joined: 10 Oct 2009
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Posted: 23 Nov 2009 at 17:02 \| IP Logged

if the sale leaseback is major >10%

then you amortize the deferred gain as an offset to depreciation expense.

if your deferred gain which is the amount of pvmlp/fmv = 10% is a capital lease then

your deferred gain is recognized each year as

dr unearned revenue

cr accumulated depreciation

this reduces your annual depreciation, and therefore recognizes the deferred gain through lower depreciation expense.

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lovethepirk
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Posted: 23 Nov 2009 at 17:34 \| IP Logged

Joe,

I think you should use Depr expense as the credit.

if you credit accum depr you would be adding to the depreciation and not removing some.

we need to reduce depr not add to it so we can show more earnings as we bleed this unearned gain into reality

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