SUMMARY OF ACCOUNTING FOR FINANCE LEASE

TRANSACTION LESSOR
LESSEE DIRECT FINANCING SALES TYPE
a. payment of initial direct cost Property xx Property xx Initial direct cost xx
(depending on who pays) Cash xx Cash xx Cash xx
effect: increase depreciation but not part of effect: give rise to the computation of a effect: added to Cost of sales in
lease liability reduced implicit interest rate determining the gross income
using interpolation process
added to the cost of property to deter-
mine the net investment
b. recording of lease Property xx Lease receivable xx Lease receivable xx
Lease liability xx Property xx Sales xx
computation: Unearned interest in. xx Unearned interest in. xx
Fair value of property computations: Cost of sales xx
LOWER Inventory xx
PV of Min, lease payment (assuming perpetual)
a. rental payments Direct financing Sales type
b. bargain purchase option * Gross investment (GI) Gross rentals ---same----
1. sufficiently lower Residual value (guaranteed or
2. reasonably certain unguaranteed)
c. guaranteed residual value Bargain purchase option
discounted using:
1. rate implicit in the lease * Net investment (NI) Cost of asset + Initial direct PV of Gross Investment
2. lesee's incremental borrowing rate costs
* Unearned interest income (UII) GI - NI GI - NI

Cost or net investment xx * Sales N/A Lower of Net investment or

Less: PV of RV xx Fair value of asset
Amount to be recovered from rent xx * Cost of Sales (COS) N/A Cost of asset + initial direct cost
divided by applicable PV factor xx * Gross profit (GP) N/A Sales - COS
Annual rental xx * Residual value
a. will revert
1. guaranteed PV is deducted from cost of the PV is included in sales because the lessor
Note 1 : if the asset will not revert to the lessor, the residual value is asset or NI for the computation knows that the entire asset has been sold
completely ignored, meaning not included in the computation of the of annual rental (p428) (p448)
gross investment (since all the risks and rewards has already
been transferred)
 SUMMARY OF ACCOUNTING FOR LEASE
TRANSACTION LESSOR
LESSEE DIRECT FINANCING SALES TYPE
2. unguaranteed ------ same ------- Gross profit is computed as follows:
Sales( excluding PV of
unguaranteed residual value) xx
COS (excluding PV of
unguaranteed residual value) (xx)
Gross profit xx
b. if will not revert (refer to Note 1)

c. receipt of rentals If payable at the end

Interest expense xx Cash xx
Lease liabilty xx Lease receivable xx ------- same ----------
Cash xx Unearned int inc xx
If payable in advance Interest inc xx
Lease liabilty xx
Cash xx
(1st payment applicable all to principal)
Interest expense xx
Accrued int pay xx
(at the end of the period)
Accrued int pay xx
Lease liability xx
Cash xx
(next payments)
d. receipt of contingent rents Rent expense xx Cash xx ------- same ----------
Cash xx Rent income xx
e. payment of executory costs Repairs & main xx ------- same ---------- ------- same ----------
Cash xx
f. Bargain purchase option (BPO)
1. If exercised Lease liability xx Cash xx ------- same ----------
Cash xx Lease receivable xx
2. If not exercised Acc.deprn xx Property xx (same except for the use of "Inventory"
Lease liability xx Loss on finance lease xx account instead of "Property")
If payable in advance: Loss on fin lease xx Lease receivable xx
Lease liability xx Property xx (lower of the fair value and bargain
Acc int pay xx purchase option)
(The amount is equal to the BPO at the end of the lease term)
 TRANSACTION LESSOR
LESSEE DIRECT FINANCING SALES TYPE
g. Return of property
1. with GRV
a. FV ≥ GRV Acc deprn xx Property xx (same except for the use of "Inventory"
Lease liability xx Lease receivable xx account instead of "Property")
Property xx
b. FV ‹ GRV Acc deprn xx Cash xx
Lease liability xx Property xx
Property xx Lease receivable xx
Loss on finance lease xx
Cash xx
2. with UGRV Acc deprn xx a. FV ≥ GRV (same except for the use of "Inventory"
Property xx Property xx account instead of "Property")
Lease receivable xx
Note 2: UGRV is not included in the computation of lease b. FV ‹ GRV
liability and ignored in the computation of depreciation Loss on finance lease
Property xx
h. year end adjustments Leae receivable xx
Depreciation Depreciation xx
Acc deprn xx
Transfer of title useful life
BPO
75% of economic life
90% of fair value shorter of useful life and lease term
Prepared by:
Anbert Angelo C. Cayna, CPA FSUU, Butuan City