On January 15, 2015, Leno, Inc., which has a March 31 year-end, entered into a transaction to sell the land and building that contained its manufacturing operations for a total selling price of $19,750,000. The book value of the land and the building was $3,420,000. The final closing was not expected to occur until sometime between July 2016 and March 2017.
On March 16, 2015, Leno, Inc., received an irrevocable letter of credit, issued by a major bank, for $5,000,000, which represented more than 25 percent of the sales price. Leno, Inc., would collect the $5,000,000 and would keep the money even if the buyer decided not to complete the transaction. The letter of credit had an option for an extension for up to one year for a total period of two years. At closing, the entire selling price was to be paid in cash.
Leno, Inc., was going to continue its manufacturing operations in the building and would continue to be responsible for all normal occupancy costs until final closing, when it would move to another location. After the sale, the building would be torn down and replaced by a large office building complex.
Required:
a. Based on relevant accounting pronouncements for the sale of real estate, how should Leno, Inc., account for the transaction at March 31, 2015?
b. What additional types of evidence should the auditor examine prior to recognizing any gain on the transaction?
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