On January 1, 2010, Columbus Properties sold a building to another company and immediately leased it back again.The Columbus' book value for the building was $15, 954.The lease was for five years with $5, 000 payable at the end of each year.The payments, discounted at 10%, equaled $18, 954.Which entry would Columbus Properties not make in 2010?
A)
$\begin{array} { l }
\text { Depreciation Expense: Leased Asset } \quad 3,790 \
\text { Accumulated Depreciation: } \
\text { Leased Asset } \quad \quad3,790 \

\end{array}$
B)
$\begin{array} { l r }
\text { Cash } & 18,954 \
\text { Building } & 15,954 \
\text { Profit on Sale-Leaseback } & 3,000
\end{array}$
C)
Leased Equipment Under Capital Leases $\quad 18,954$
Obligation Under Capital Leases $\quad 18,954$
D)
$\begin{array} { l c }
\text { Obligation Under Capital Leases } & 3,105 \
\text { Interest Expense } & 1,895 \
\text { Cash } & 5,000
\end{array}$

Question

On January 1, 2010, Columbus Properties sold a building to another company and immediately leased it back again.The Columbus' book value for the building was $15, 954.The lease was for five years with $5, 000 payable at the end of each year.The payments, discounted at 10%, equaled $18, 954.Which entry would Columbus Properties not make in 2010?
A)
$\begin{array} { l } 
\text { Depreciation Expense: Leased Asset } \quad 3,790 \
\text { Accumulated Depreciation: } \
\text { Leased Asset }  \quad \quad3,790 \

\end{array}$
B)
$\begin{array} { l r } 
\text { Cash } & 18,954 \
\text { Building } & 15,954 \
\text { Profit on Sale-Leaseback } & 3,000
\end{array}$
C)
Leased Equipment Under Capital Leases $\quad 18,954$ 
Obligation Under Capital Leases $\quad 18,954$
D)
$\begin{array} { l c } 
\text { Obligation Under Capital Leases } & 3,105 \
\text { Interest Expense } & 1,895 \
\text { Cash } & 5,000
\end{array}$

Quizplus · Accepted Answer

Explanation: The correct entry for Columbus Properties would not include recognizing a profit on the sale-leaseback transaction in this manner. Accounting standards typically require that gains from sale-leaseback transactions be deferred and recognized over the lease term, especially when the lease is classified as a finance (or capital) lease. The entries for recognizing depreciation, recording the leased asset and obligation, and accounting for the lease payment and interest expense are consistent with accounting for a capital lease. However, recognizing a profit directly at the time of the sale-leaseback is not in line with these standards.

On January 1, 2010, Columbus Properties Sold a Building to Another