Sportco Limited is suffering temporary cash flow difficulties due to poor economic conditions. To raise sufficient finance to allow operations to continue until economic conditions improve, Sportco entered into an agreement with a major lease corporation, Leaseco Limited. On 1 January 20X2, Sportco sold its largest manufacturing property to Leaseco at its fair market value, \(\$ 1,750,000\). The property had a net book value of \(\$ 250,000\) at the time of the sale.

Sportco, in turn, leased back the property from Leaseco for 15 years. The annual rent was \(\$ 175,000\), due each year starting on 1 January 20X2. Sportco can repurchase the property from Leaseco at the end of the lease term. The repurchase price (stated in the lease contract) is \(\$ 2,500,000\), based on projected fair values for the property. The land value is estimated to be \(40 \%\) of the total fair market value of the property, while the building represents the other \(60 \%\). Sportco amortizes its buildings at a declining-balance rate of \(10 \%\).

Sportco's incremental borrowing rate is \(7 \%\). Its financial statements are prepared in accordance with generally accepted accounting standards.

Required:

How should Sportco account for this transaction in its financial statements for the year ending 31 December 20X2? Be specific, and explain the approach that you have chosen. Ignore any income tax issues and disclosure issues.