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Accounting for leases

Rate implicit in the lease 7.04%

Other □ Title to the asset remains with Lessor Corp upon lease
expiration
□ Lessee Corp does not guarantee the residual value of the
equipment at the end of the lease term and Lessor Corp
does not obtain any third-party residual value insurance
□ Estimated fair value of the equipment at the end of the
lease term is $250
□ Lessee Corp pays for all maintenance of the equipment
separate from the lease
□ There are no initial direct costs incurred by Lessee Corp
□ Lessor Corp does not provide any incentives

Lessor Corp determines that the lease is a sales-type lease.

How would Lessor Corp measure and record this lease?

Analysis

Lessor Corp would first determine the total net investment in the lease as the present value of the lease
receivable and the unguaranteed residual asset.

□ The present value of the lease receivable is equal to the present value of the remaining lease
payments discounted at 7.04%; this amount is $3,722.

□ The present value of the unguaranteed residual asset discounted at 7.04% is $178.

□ Lessor Corp’s net investment in the lease is $3,900 (the sum of the lease receivable ($3,722) and
the unguaranteed residual asset ($178)).

To determine the selling profit or loss arising from the lease, Lessor Corp would calculate the
difference between the fair value of the underlying asset (or the lease receivable plus any proceeds
received at or before lease commencement, if lower) and the carrying amount of the underlying asset
net of any unguaranteed residual asset. Since the present value of the lease receivable plus the upfront
proceeds ($4,822) is lower than the fair value of the underlying asset ($5,000), the selling profit is
calculated as follows:

Present value of the lease receivable $3,722
Plus, the lease payment received at lease commencement 1,100

Less, the carrying value of leased asset ($4,500) net of unguaranteed residual
asset ($178) (4,322)

Selling profit $500

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