Question

    Company A sold machinery having a WDV of ₹ 40 lakh to Company B for ₹ 50 lakh (FV ₹ 50 lakh) and the same machinery was leased back by Company B To Company A. The Lease back is in nature of operating Lease. Being an Auditor suggest the treatment to Company A.

    A Company A should amortise the profit of ₹ 10 lakh over a lease term. Correct Answer Incorrect Answer
    B Company A can opt for both, amortise the profit of ₹ 10 lakh over a lease term and defer the profit. Correct Answer Incorrect Answer
    C Company A should recognise the profit of ₹ 10 lakh immediately. Correct Answer Incorrect Answer
    D Company A should defer the profit. Correct Answer Incorrect Answer

    Solution

    As an auditor, I would suggest that Company A should recognize the profit of ₹10 lakh immediately. In this scenario, Company A has sold the machinery to Company B for ₹50 lakh, even though the written-down value (WDV) of the machinery was ₹40 lakh. The difference of ₹10 lakh between the selling price and the WDV represents a profit on the sale of the machinery. Since the leaseback arrangement is in the nature of an operating lease, and not a finance lease, Company A should recognize the entire profit of ₹10 lakh immediately at the time of the sale. Operating leases are typically treated as normal rental agreements, and any profit or loss on the sale should be recognized upfront.

    Practice Next