Under ASC 842, in a Sale and Leaseback transaction, if the transfer of the asset does NOT meet the requirements for a sale (e.g., the seller-lessee has a repurchase option), how should the seller-lessee account for the transaction?

Answer options:

Recognize the sale and a finance lease.

Recognize the sale and an operating lease.

Defer the gain and amortize it over the lease term.

Account for the transaction as a financing arrangement (failed sale).

How to approach this question

If you 'sold' it but can take it back, did you really sell it? No. You just borrowed money using the house as collateral. That's a financing arrangement.

Full Answer

D.Account for the transaction as a financing arrangement (failed sale).✓ Correct

ASC 842-40 states that if the transfer doesn't meet ASC 606 sale criteria (e.g., repurchase option exists), it is a 'failed sale'. The seller keeps the asset and records the cash received as a financial liability.

Common mistakes

Applying old lease rules (deferring gain).

Question 30 All questions Question 32

Practice the full CPA BAR Practice Exam

50 questions · hints · full answers · grading

More questions from this exam

Q01TechGlobal Inc. is evaluating the performance of its European division using Economic Value Added...Hard Q02A manufacturing company is analyzing its production process to identify bottlenecks. The process ...Medium Q03Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identi...Medium Q04RetailCo is evaluating two strategic initiatives using a Balanced Scorecard approach. <br/>Initia...Medium Q05A company is deciding between two mutually exclusive projects. <br/>Project X: NPV = $50,000, IRR...Medium

View all 50 questions →