Finance Assignment Help With Accounting For Lessors

10.9. Example (Accounting for lessors)

A firm manufactures and then leases a photocopier; the annual minimum lease payments (MLPs) are $20,000 at the end of each year for three years. The cost of manufacture is $40,000. At the end of the lease the unguaranteed residual value is $10,000. The discount rate used is 8%.

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If the lease is treated as a sales-type capital lease the lessor'sfinancial reporting at the beginning of the lease agreement will be as follows.

Gross investment in lease Amount
MLPs of $20,000 x 3 $60,000
Residual value $10,000
Net investment in lease
Present value of MLPs $51,542
Present value of residual value $7,938
Unearned income $10,520
At inception, in financial statements
Sales revenue $51,542
COGS $32,062
Gross profit on sale $19,480
Gross investment in lease $70,000
less unearned income $10,520
Net investment in lease


Thereafter the lease payments received of $20,000 a year are divided between interest income (8% of the net investment) and a reduction in investment.

The interest payment is cash flow from operations and the reduction in investment is an investing cash flow.

If a lease is accounted for as an operating lease then:

The assets will continue to be reported on the lessor's balance sheet, they will be depreciated as usual (with a cost of $40,000, salvage value of $10,000).

The lease payments will be rental income and be allocated to operating cash flow.

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