Peter owns Detail Masters Inc., an auto paint and body shop. To obtain funds to

Question

Peter owns Detail Masters Inc., an auto paint and body shop. To obtain funds to build an addition to the shop, he wants to arrange a sale-leaseback of shop equipment with another local business. Should the validity of this transaction come into question, which of the following questions would a court consider to determine if there is a lease?

I.     Are rental payments in excess of current fair rental value?

II.    Will the leasor acquire title following payment of the required amount of rentals?

III.   Is accelerated depreciation being taken on the leased property?

a.

I only

b.

II only

c.

III only

d.

II and III

a.

I only

b.

II only

c.

III only

d.

II and III

Explanation / Answer

Sale-leaseback transaction involves the sale of an asset and lease-back the same asset to the seller/lessee. In this transaction, the seller/lessee transfer the right of ownership to the purchaser/lessor and retains the right to use the assets. Further, the lessor/purchaser receives the benefit of accelerated deprecition & tax benefits in his books of accounts. Please note, the sale-lease back has to be recognised either as 'operating lease' or 'financial lease' subject to meeting recgonition criteria mentioned in the lease accounting standard.

Hence, Option d is the answer, as the court has to consider both II & III

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