Finance Assignment Help With Accounting For Lessors
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%.
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|
|Net investment in lease|
|Present value of MLPs||$51,542|
|Present value of residual value||$7,938|
|At inception, in financial statements|
|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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