Answer to Question #22964 in Finance for Jerry

Question

Learning objectives:
To learn about the recognition and reporting of profit or loss arisen in lease and lease back transactions as per IAS-17

Discussion Question:
Mr. John has made an agreement to sell a vehicle to Mr. Tom. As per conditions of the agreement, he has taken it back on lease on the same day. Mr.John has categorized the lease agreement as operating lease and treated it in accordance with the provisions of IAS-17. The term for the lease contract is five years. The lease rentals for this contract are as follows:

Years, Lease Rentals (US$)
1. 2,000
2. 3,000
3. 4,000
4. 5,000
5. 6,000

Required:
How will Mr. John account for the profit/loss on the sale of the asset assuming that Sale value = Fair value = US$. 20,000, if Carrying value is:

1. US$. 20,000
2. US$. 18,000
3. US$. 22,000