Chapter 15 Sales Type Lease
Chapter 15 Sales Type Lease
Chapter 15 Sales Type Lease
The lessor in a Sales type lease is actually a manufacturing or dealer that use the lease as a means
of facilitating the sale of product
A sales type lease involves the recognition of a manufacturer or dealer profit on the transfer of
the asset to the lessee in Addition to the recognition of interest income.
Accounting Considerations
Gross investment – This is equal to the gross rentals for the entire lease term plus the absolute
amount of the residual value, guaranteed or unguaranteed.
Net Investment in the lease – This is equal to the present value of the gross rentals plus the resent
valued of the residual value, Guaranteed/Unguarenteed.
Unearned interest income – This is the difference between the gross investment and net
investment in the Lease.
Sales – The amount equal to the net investment in the lease (Present value of lease payments) or
fair value of the asset, whichever is lower.
Cost of Goods sold – This is equal to the cost of the asset sold minus the present value of
unguaranteed residual value plus initial direct cost paid by the lessor.
Gross Profit – This is the usual formular of sales minus cost of goods sold.
Initial Direct Cost – This amount is expensed immediately in a sales type lease as component of
cost of goods sold.
Illustration
On Jan, 1, 2019, machinery was leased to Lessee Company with the following provisions:
At the end of the lease term, the machinery will revert to the Company
The lease receivable and unearned interest income are the same whether the scenario is
guaranteed or unguaranteed residual value
Under the “residual value guarantee scenario” the present value of the residual value is included
in the sales revenue because the lessor knows that the entire asset has been sold
Under the unguaranteed residual” the present value of the unguaranteed residual is not included
in the sales revenue.
Disclosure - Lesser
1. For Finance Lease:
a. Selling profit or loss
b. Finance income on the net investment in the lease
c. Income relating to variable lease payments not included in measurement of net
investment in the lease.
2. For operating lease, lease income, separately disclosing income relating to variable lease
payments that do not depend on an index rate
Additional Disclosures
A lessor shall disclose additional qualities and quantitative information to assess effect of lease
on Financial Position, Performance and cash flows. Including;