A company enters into a sale-leaseback transaction. The transfer of the asset qualifies as a sale under ASC 606. The selling price is $1,000,000 (equal to fair value). The carrying amount is $800,000. The lease payments are at market rates. How much gain should the seller-lessee recognize immediately?

Answer options:

$200,000 deferred and amortized

$200,000 recognized partially based on rights retained

$200,000 recognized immediately

How to approach this question

Check if it's a Sale (ASC 606). If yes, recognize Gain = Price - Book Value. (Adjust if price is not at Fair Value). Since Price = FV, recognize full gain.

Full Answer

D.$200,000 recognized immediately✓ Correct

Under ASC 842, if a sale-leaseback transaction meets the criteria for a sale under ASC 606, the seller-lessee recognizes the entire gain (Selling Price - Carrying Amount) immediately. Deferral is only required if the sale price is not at fair value (off-market terms).

Common mistakes

Applying pre-ASC 842 rules (deferral of gain).

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