Question

General Tools is seeking ways to maintain and improve cash balances. As company controllower, you have proposed the sale and leaseback of much of the company's equipment. As seller-lessee, General Tools would remain the right to essentially all of the remaining use of equipment. The term of the lease would be six years. You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn't understand the way you will account for the transaction. "I rally had counted on that gain on the sale portion of the trasaction to bolster this period's earnings. What gives." he wondered. "Put it in a memo, will you? I'm having trouble following what you're saying to me." Write a memo to your CFO. Include discussion of each of these points. 1. How the transaction should be accounted for. 2. Why General tools will not get the gain the CFO had counted on.

Answer 1

Ans:- In the Sale And Lease back situtaion a company has to sale out the company equipments and take them back on lease from the buyer which helps the company for arranging cash or liquidity and also no cost has been paid as a cost on interest and other.

(i) As by doing the sale and lease back transaction you have to earned the profit on sale also and also you get cash for proper cash flows In this case we have earned the profit on sale which helps to show better our financial statements and also we get cash which makes proper liquidity in our transactions this also makes our financial statements better to present. and also we get cash for working capital with out any cost.

(ii) General tools will not get the gain the CFO has counted on because after the 6 years when our lease period is completed then we need to purchas asset and also we can't get the claim of depreciation on it and we have to pay the tax on profit on sale of asset also if profit earned on sale of equipment

the sale and lease bazck situation can make better our position temporary but not permanently in the future we may be face risk of non avaibality of cash for purchasing of asset. Sale and LEase back situation gets benfit only for one or two year not more then that and also with the sale and lease back our equipment gets disposed off or gets eliminated from the assets in balance sheet