Financial Accounting and Reporting-CPA Practice Exam

How should a deferred gain from a capital leaseback be amortized?

1. Over the lease term

2. Over the asset life

3. As a lump sum

4. Not amortized at all

The correct answer is: Over the asset life

The amortization of a deferred gain from a capital leaseback should be conducted over the asset's life. This reflects the nature of the deferred gain, which arises when an entity leases back an asset that it sold. When a company sells an asset and simultaneously enters into a leaseback arrangement, any gain on the sale that is deferred must be amortized over the period during which the asset is expected to provide economic benefits to the lessee. This is typically the useful life of the asset, ensuring that the recognition of the gain aligns with the consumption of the underlying asset's economic benefits. Amortizing the deferred gain in this manner adheres to the matching principle in accounting, which seeks to align revenues earned with the expenses incurred in generating those revenues. By recognizing the gain over the life of the asset rather than the lease term or as a lump sum, the financial statements more accurately reflect the ongoing performance of the company as it utilizes the leased asset. This approach also avoids any distortion in profit recognition that could arise from a one-time gain recognition.