Lease Accounting

Lessor – Landlord

Lessee – tenant

2 types of lease

Operating lease and finance lease (rent to own)

Finder’s fee – initial direct cost

Security deposit – noncurrent liability, because it will be returned after the determination of lease term

Lease bonus – unearned income or revenue, amortized as income over the lease term

Executory cost – expense

Lease incentives – reduction to income by the lessor

Sale type lease

Asset reverts to the lessor (whether guarantee or unguaranteed)

Gross investment: Annual rental x term + (residual value)

NI: annual rental x A1 – (residual value x PV1)

Unearned interest/finance income/total interest: GI – NI

Computation of Profit (GRV): sales (equal to net investment) – (cost – idc) = gross profit

Asset reverts to the lessee

GI: annual rental x term

NI: annual rental x A1