CHAPTER 13:

DIRECT FINANCING LEASE-LESSOR

Objectives:
1. To know the finance lease classification on the
part of the lessor.
2. To define a direct financing lease.
3. To distinguish a direct financing lease from a
sales type lease.
4. To understand the gross investment and net
investment in a direct financing lease.
5. To recognize interest income in a direct financing
lease using the effective interest method.
Finance Lease- there is transfers substantially all
risks and rewards incidental to ownership of an
underlying asset.
2 types:
1. Direct Financing Lease
-recognizes only interest income.
-an arrangement between a financing entity and a
lessee.

2. Sales Type Lease

-recognizes interest income and gross profit on sale.
-the lessor is engaged as a dealer or manufacturer.
Accounting Considerations
a. Gross investment= Gross rentals for the entire lease
term + Absolute amount of the residual value
(guaranteed or nonguaranteed)

b. Net investment= Cost of the asset + Any initial

direct cost paid by the lessor.

c. Unearned interest income= Gross Investment - Net

Investment