Test the sale before the leaseback

Cedar Trail proposes to transfer its distribution center for $12 million and lease it back for 10 years. The buyer wires cash and receives title. Cedar Trail also receives an option to repurchase the building at a fixed price. The wire confirmation establishes cash receipt, not transfer of control. Gain recognition must wait for the sale analysis.

Gate 1: did control transfer?

Apply the applicable Topic 606 sale requirements to the underlying asset. Inspect payment, legal title, physical possession, risks and rewards, acceptance, repurchase rights, and other retained control. A substantive repurchase option can prevent sale accounting even when title transfers.

If the transfer is not a sale, Cedar Trail keeps the building and recognizes a financial liability for proceeds. The buyer-lessor records a financial asset, not a purchased building followed by lease income.

Gate 2: are the terms at market?

When a sale exists, compare the sale price and lease terms with fair value. Use the more readily determinable basis. Treat an above-market sale price as a prepayment of rent and a below-market price as additional financing under the applicable conditions. Keep valuation evidence outside the lease calculator.

Gate 3: account for the leaseback and disclosure

Classify and measure the seller-lessee's leaseback under Topic 842. Record the sale and applicable gain or loss only after the preceding gates. Disclose the transaction's main terms and its gain or loss separately from other disposals.

Exit check

Write a one-page sale-control memorandum for the case. State the controlling facts, repurchase analysis, market-term evidence, accounting route, entries if the sale fails, entries if it succeeds, and evidence that would reverse the conclusion.