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Sales-Type Lease Accounting Example

This document provides an example of accounting for a sales-type lease with a residual value. It outlines the key terms of a lease between Company Dee and Company Eff for machinery over 5 years. It then shows the 4 step process to: 1) compute the gross investment, 2) compute the net investment, 3) compute unearned interest income, and 4) compute gross profit. Journal entries are provided to record the transaction at inception and to record the return of the machinery at the end of the lease term.

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738 views2 pages

Sales-Type Lease Accounting Example

This document provides an example of accounting for a sales-type lease with a residual value. It outlines the key terms of a lease between Company Dee and Company Eff for machinery over 5 years. It then shows the 4 step process to: 1) compute the gross investment, 2) compute the net investment, 3) compute unearned interest income, and 4) compute gross profit. Journal entries are provided to record the transaction at inception and to record the return of the machinery at the end of the lease term.

Uploaded by

Queen Valle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Illustrative Problem – Sales type Lease with residual value

On January 01, 2020, Company Dee, a dealer in machinery leased to Company Eff with the
following information:

Annual rental payable at the every of each year 800,000


Lease term 5 years
Useful life of machinery 5 years
2,000,00
Cost of Machinery 0
Estimated residual value 200,000
Initial direct cost paid by lessor 100,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 5 periods at 1% 3.7908
Present value of 1 for 5 periods at 10% 0.6209

At the end of the lease term on Dec. 31, 2024, the machinery will revert to the lessor.

The perpetual inventory system is used,

Step1 – computation for gross investment

4,000,0
Gross rentals (P800,000 x 5 years) 00
200,00
Add: residual value 0
4,200,0
Gross Investment (Lease Receivable) 00

Step 2 – computation for the net investment

3,032,64
Present value of gross rentals (800,000 x 3.7908) 0
Add: present value of residual value guarantee (200,000 x 0.6209) 124,180
3,156,82
Net investment (total present value) 0

Step 3 – computation of Unearned Interest Income

4,200,0
Lease Receivable 00
3,156,8
Less: Total present value 20
Unearned Interest 1,043,1
Income 80

Step 4 – computation of gross profit

3,156,82
Sales = total present value 0
Cost of goods sold = cost of (2,000,0
machinery 00)
(100,000
Initial direct cost )
1,056,82
Gross Income 0

Journal Entries on January 01, 2020

Lease Receivable 4,200,000


Cost of Goods Sold 2,000,000
Sales 3,156,820
Unearned Interest Income 1,043,180
Inventory 2,000,000

Cost of Goods Sold 100,000


Cash 100,000

At the end of the lease term, the machinery will revert to the lessor. The journal entry by
then will be:

Inventory 200,000
Lease Receivable 200,000

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