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Scope

Interest paid to Supplier Corp at the beginning of year 2 would be accrued during year 1 (via a debit to
the lease receivable and credit to interest income). At the beginning of the second year of the
arrangement, Supplier Corp would record the following entry to record receipt of the fixed medical
equipment lease payment, variable incremental patient payment based on expected patient volume,
and interest on the lease receivable.

Dr. Cash $500,000
Dr. Lease receivable $133,460

Cr. Lease receivable $469,500

Cr. Deferred service revenue $30,500

Cr. Interest income $133,460

EXAMPLE 2-17
Allocating variable consideration – contract for sale of medical equipment and consulting services
(sales-type lease)
Assume the same facts as Example 2-16 except that the standalone selling price for the consulting
services is estimated to be $100,000 per year ($500,000 over the term of the contract), which is equal
to the expected variable payment. Additionally, the variable payment for consulting services will be
received as those services are rendered.

How should Supplier Corp account for this arrangement at lease commencement and in the first year?

Analysis

The equipment lease and consulting services are separate lease and nonlease components,
respectively. The variable payments relate specifically to the nonlease component (consulting
services).

Supplier Corp determined that it should allocate the variable payments entirely to the nonlease
component (consulting services) because doing so would be consistent with the transaction price
allocation objective in ASC 606-10-32-28 and ASC 606-10-32-40.

The fixed payments of $2,000,000 ($400,000 × 5 years) would be allocated to the lease component.
Since the lease is a sales-type lease, Supplier Corp would remove the asset from its balance sheet and
record a receivable equal to the present value of those fixed lease payments.

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