Reference no: EM132604255

Questions -

1. Lessee Obtains Control Prior to Lease Commencement

Phoenix Company wishes to lease a new vehicle for five years. The vehicle manufacturer is not willing to enter into lease arrangements, so Phoenix Company identifies a bank that is willing to purchase the vehicle and enter into a lease under an agreement that Phoenix Company expects to classify as an operating lease.

Phoenix Company purchases the vehicle from the manufacturer, takes possession, and obtains legal title. Shortly thereafter, Phoenix Company sells the vehicle to the bank. The sale agreement requires the bank to reimburse Phoenix Company for all costs incurred to acquire the vehicle from the manufacturer and provides the bank with legal title to the vehicle. Concurrent with the sale, Phoenix Company and the bank enter into a five-year lease of the vehicle.

Should Phoenix Company account for this transaction as a sale and leaseback?

2. Lessee Obtains Title, But Not Control Prior to Lease Commencement

Assume the same facts as in Part 1 except that the manufacturer arranges for the lease between Phoenix Company and the bank. For tax reasons, Phoenix Company and the bank agree that legal title will momentarily transfer from the manufacturer to Phoenix Company and then Phoenix Company will immediately transfer the title to the bank.

Should Phoenix Company account for the transaction as a sale and leaseback?