Finance Assignment Help With Financial Reporting By Lessors

10.8. Financial Reporting By Lessors

A sales-type lease is used by manufacturers and includes a manufacturing or merchandising profit as well as interest income reflecting the financing element of the transaction.

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A financial institution uses a direct-financing lease when the only profit is from interest income.

For a lessor to treat a lease as a capital lease (which they would generally prefer) it must meet at least one of the already discussed above and both of the following criteria:

  • Collectability of the MLPs is reasonably certain.
  • There are no significant uncertainties regarding the amount of reimbursable costs under the lease agreement.

Financial statement reporting for a sales-type lease

  • Gross investment is the sum of lease payments and residual value.
  • Net investment is the sum of present value of lease payments and residual value.
  • Gross minus net investment is the unearned income or interest component of the lease.
  • Sales revenue is the present value of lease payments.
  • COGS are manufacturing costs less the present value of the residual value.

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