Page 144 - pwc-lease-accounting-guide_Neat

Accounting for leases

Lessor Corp would record revenue at lease commencement equal to the lease receivable amount plus
the lease payment received at lease commencement ($4,822). Cost of goods sold would be recorded as
the difference between the carrying value of the leased asset ($4,500) and the discounted value of the
unguaranteed residual asset ($178).

Lessor Corp would record the following journal entry on the lease commencement date.

Dr. Lease receivable $3,722

Dr. Cash $1,100

Dr. Unguaranteed residual asset $178

Dr. Cost of goods sold $4,322

Cr. Property, plant and equipment (leased asset) $4,500

Cr. Revenue $4,822

See Example 4-14 for an illustration of the subsequent measurement and recognition for this fact
pattern.

EXAMPLE 4-8

Sales-type lease recognition – real estate with a purchase option (lessor)

Lessor Corp enters into a property (land and building) lease with Lessee Corp on January 1, 20X9. The
following table summarizes information about the lease and the leased asset.

Lease term 10 years
Renewal option Five 5-year renewal options

If exercised, the annual lease payments are reset to then
current market rents.

Economic life 40 years

Fair value of the leased property $5,000,000

Lessor Corp’s carrying value of the
leased property $5,000,000

Purchase option Lessee Corp has an option to purchase the property at the
end of the lease term for $3,000,000.

Annual lease payments The first annual payment is $500,000, with increases of 3%
per year thereafter (see schedule below).

Payment date Annually on January 1 (first payment is made at lease
commencement)

4-21