CHAPTER 9
FINANCE LEASE – LESSOR
QUESTION 9-1
Contrast a sales-type lease from a direct financing lease.
ANSWER 9-1
Lessors classify a finance lease either as sales-type or direct financing lease.
1. The primary difference is the recognition of a manufacturer or dealer profit.
The sales-type lease recognizes a manufacturer or dealer profit. The direct financing lease does
not.
2. Both sales-type and direct financing lease recognize interest income or financial revenue.
QUESTION 9-2
Explain the following in connection with a “direct financing lease”:
1.
2.
3.
4.
Gross investment
Net investment in the lease
Unearned interest income
Initial direct cost
ANSWER 9-2
1. Gross investment in the lease
The gross investment in the lease is equal to the gross rentals for the entire lease term plus the
absolute amount of the residual value, whether guaranteed or unguaranteed. Actually, this is
the amount debited to lease receivable.
2. Net investment in the lease
The net investment in the lease is equal to the cost of the asset plus any initial direct cost
incurred by the lessor.
3. Unearned interest income
The unearned interest income is the total financial revenue of the lessor which is the difference
between the gross investment and net investment in the lease.
4. Initial direct cost
In a direct financing lease, the initial direct cost incurred by the lessor is added to the cost of
the asset to get the net investment in the lease.
This would effectively spread the initial direct cost over the lease term and reduce the amount
of interest income.
Accordingly, the interest rate implicit in the lease is recomputed so as to include the initial
direct cost in the measurement of the lease receivable.
QUESTION 9-3
Explain the following in connection with a “sales type lease”.
1.
2.
3.
4.
5.
6.
7.
Gross investment
Net investment in the lease
Unearned interest income
Sales
Cost of sales
Gross profit
Initial direct cost
ANSWER 9-3
1. Gross investment – this is equal to the gross rentals for the entire lease term plus the
absolute amount of the residual value, whether guaranteed or unguaranteed.
Recall that this is the same definition of gross investment in a direct financing lease.
2. Net investment in the lease – This is equal to the present value of the gross rentals plus
the present value of the residual value, whether guaranteed or unguaranteed.
3. Unearned interest income – This is the total financial revenue of the lessor which is the
difference between the gross investment and net investment in the lease.
4. Sales – The amount is equal to the net investment in the lease or fair value of the asset,
whichever is lower.
5. Cost of sales – This is equal to the cost of asset sold plus the initial direct cost incurred by
the lessor.
6. Gross profit – This is the usual formula of sales minus cost of sales.
7. Initial direct cost – This amount is expensed immediately in a sales type lease as
component of cost of sales.
QUESTION 9-4
Explain the “actual sale” of the leased asset by the lessor to the lessee.
ANSWER 9-4
When a lessor actually sells an asset that it has been leasing under a finance lease, the
difference between the sale price and the carrying amount of the lease receivable is
recognized in profit or loss.
The carrying amount of the lease receivable is equal to the balance of the lease receivable
minus the unearned interest income.
QUESTION 9-5
What are the disclosures required in a finance lease on the part of lessor?
ANSWER 9-5
1. A reconciliation between the gross investment in the lease and the present value of the
minimum lease payments receivable at the end of reporting period.
2. The gross investment in the lease and the present value of the minimum lease payments
receivable at the end of reporting period for each of the following periods:
a. Not later than one year
b. Later than one year and not later than 5 years.
c. Later than 5 years
3. Unearned finance income or unearned interest income.
4. Unguaranteed residual value accruing to the benefit of the lessor.
5. Accumulated allowance for uncollectible minimum lease payments receivable.
6. Contingent rent recognized as income in the period.
7. A general description of the lessor’s material leasing arrangements.
QUESTION 9-6 Multiple choice (PAS 17)
1. Gross investment in the lease is
a. Aggregate of the minimum lease payments under a finance lease of the lessor and
any unguaranteed residual value accruing to the lessor.
b. The minimum lease payments under a finance lease of the lessor.
c. Present value of minimum lease payments under a finance lease of the lessor and any
unguaranteed residual value.
d. Present value of the minimum lease payments under a finance lease of the lessor.
2. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor.
c. Cost of the asset minus guaranteed residual value.
d. Cost of the asset plus unguaranteed residual value.
3. Lessors shall recognize asset held under a finance lease as a receivable at an amount
equal to
a. Gross investment in the lease
b. Net investment in the lease
c. Gross rentals
d. Residual value, whether guaranteed or unguaranteed.
4. Which is the correct accounting treatment for a finance lease in the accounts of a lessor?
a. Treat as a noncurrent asset equal to net investment in the lease. Recognize all finance
payments in the income statement.
b. Treat as a receivable equal to gross amount receivable on lease. Recognize finance
payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the lease. Recognize finance
payment by reducing debt and taking interest to income statement.
d. Treat as a receivable equal to net investment in the lease. Recognize finance
payments in cash by reduction of debt.
5. Under a direct financing lease, the excess of aggregate rentals over the cost of leased
property shall be recognized as interest income of the lessor.
a. In increasing amounts during the lease term
b. In constant amounts during the lease term
c. In decreasing amounts during the lease term
d. After the cost of leased property has been fully recovered through rentals
ANSWER 9-6
1.
2.
3.
4.
5.
a
b
b
c
c
QUESTION 9-7 Multiple choice (PAS 17)
1. Under a sales type lease, what is the meaning of gross investment in the lease?
a. Present value of minimum lease payments
b. Absolute amount of minimum lease payments
c. Present value of minimum lease payments plus present value of unguaranteed
residual value
d. Aggregate of minimum lease payments and unguaranteed residual value
2. Net investment in a sales type lease is equal to
a. Gross investment in the less unearned finance income
b. Cost of the leased asset
c. The minimum lease payments
d. The minimum lease payments less unguaranteed residual value
3. These are incremental costs that are directly attributable to negotiating and arranging
a lease.
a. Initial direct costs
b. Transaction costs
c. Costs of services
d. Executory costs
4. Initial direct costs incurred by the lessor under a sales type lease are
a. Charged to unearned income in the first period of the lease term.
b. Charged to cost of sales in the first period of the lease term.
c. Deferred and allocated over the lease term in proportion to the recognition of rent
revenue.
d. Deferred and allocated over the lease term on a straight line basis.
5. What is the treatment of unguaranteed residual value in determining the cost of sales
under a sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the cost of the leased asset.
c. The unguaranteed residual value is deducted from the cost of the leased asset at
absolute amount.
d. The unguaranteed residual value is deducted from the cost of the leased asset
at present value.
6. The sales revenue recognized at the commencement of the lease by a manufacturer or
dealer lessor is
a. Fair value of the asset
b. Present value of the minimum lease payments
c. Fair value of the asset or present value of the minimum lease payments,
whichever is lower.
d. Fair value of the asset or present value of the minimum lease payments,
whichever is higher.
7. The profit on a finance lease for lessors who are manufacturers r dealers shall
a. Not be recognized separately from finance income
b. Be recognized in the normal way on the transaction
c. Only be recognized at the end of the lease term
d. Be allocated on a straight line basis over the lease term
8. Which of the following statements characterizes a sales type lease?
a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealer profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealer profit at lease inception and interest revenue over
the life of the asset.
9. The excess of the fair value of leased property at the inception of the lease over the
carrying amount shall be recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturer profit from a sales type lease
d. Manufacturer profit from a direct financing lease
10. In a lease that is recorded as a direct sales type lease by the lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of the lease using the interest method
c. Shall be recognized over the period of the lease using the straight line method
d. Shall be recognized in full as revenue at the inception of the lease
ANSWER 9-7
1.
2.
3.
4.
5.
d
a
a
b
d
6. c
7. b
8. c
9. c
10. B