DIRECT FINANCING LEASE (LESSOR) Lease receivable xx

On the part of the lessor, a finance lease is either:

a. Direct financing lease If RV is guaranteed
- There is a transfer of ownership to lessee Sales (GR + RV) xx
- There is a purchase option COGS (Cost of asset + IDC) (xx)
- Lease term is for major port of economic life Gross income xx
of the asset (at least 75%)
- PV of lease payments amounts to substantially If RV is unguaranteed
all of the FV of the asset Sales (GR only) xx
b. Sales type lease COGS (Cost + IDC – PV of RV) (xx)
Gross income xx
DIRECT FINANCING LEASE *same gross income if asset revert back to lessor
 Lessor is actually engaged in financing business
 Revenue: Interest income Notes:
1. If with initial direct costs use new effective rate
ACCOUNTING CONSIDERATIONS 2. Only deduct residual value if asset will revert to
1. Gross investment = Gross rentals for entire term lessor otherwise ignore
plus absolute amount of RV, whether guaranteed 3. If there is a transfer of title, completely ignore the
or unguaranteed residual value both in computation of annual
2. Net investment in lease = cost of asset plus initial rental and unearned interest income
direct cost paid by lessor
3. Unearned interest income = difference between SALES TYPE LEASE – LESSOR
gross investment (1) and net investment (2) 1. Lessor is a dealer/manufacture that uses lease to
4. Initial direct cost – added to the cost of asset to sell or market its products
compute the net investment in the lease 2. Revenue
a. Gross profit from sale
Annual rental = Net investment in lease – PV of RV* b. Interest income from deferred payment
PV factor 3. Net investment = PV of gross investment

Gross rentals xx Lower of FV and PV of lease

Residual value (regardless) xx payments + PVGRV (Sales) xx
Gross investment/LR xx Less: CV of asset + IDC (COS) (xx)
Less: net investment (xx) Gross Profit xx
Unearned interest income xx
If RV is unguaranteed
Machinery (initial direct cost)xx FV and PV of lease payments (Sales)xx
Cash xx Less: CV of asset + IDC – PV of UGRV (xx)
Gross Profit xx
Lease receivable xx
Machinery xx *Gross profit amount same in all cases
Unearned interest income xx
Lease receivable xx
Cash xx Sales xx
Lease receivable xx Unearned interest income xx

Unearned interest income xx

Interest income xx

If guaranteed and FV < RV (if unguaranteed)

Machinery xx
Cash (Loss on finance lease) xx