General Tools is seeking ways to maintain and improve cashbalances. As company controller, you have proposed the sale andleaseback of much of the company’s equipment. As seller-lessee,General Tools would retain the right to essentially all of theremaining use of the equipment. The term of the lease would be sixyears.
You previously convinced your CFO of the cash flow benefits ofthe arrangement, but now he doesn’t understand the way you willaccount for the transaction. “I really had counted on that gain onthe sale portion of the transaction to bolster this period’searnings. What gives?” he wondered. “Put it in a memo, will you?I’m having trouble following what you’re saying to me.”
Required:
Write a memo to your CFO. Include discussion of each of thesepoints:
1. How the transaction should be accounted for.
2. Why General Tools will not get the gain the CFO had countedon.
