Sales Type Lease

Steps to calculate sales type lease for the lessor

1. Determine whether Gross or net method is being used 2. Find interest/ lease receivable amount 3. Recognize COGS 4. Determine profit on sale 5. Determine immediate payment 6. Determine profit on sale 7. Interest revenue accrual at year end 8. Determine total impact on IS 9. Determine year end lease receivable 10. Determine next payment amount

Operating lease

Both Lessor and Lessee recognize this

Interest rate by lessor calculations

Always use implicit rate Profit on sale & interest revenue for the first year. Lessor use Gross method JE DR: lease receivable (payment amount X # of payment) CR: unearned interest (plug) CR: sales revenue (FV of the asset @ inception) Unearned interest is contract lease receivable Not liability

Lease receivable at beginning of the year calculation

Beginning lease receivable - interest - immediate payment

Year end lease receivable

Beg lease receivable balance Minus unearned interest at beginning of year Minus immediate payment Plus interest accrual at year end = ending lease receivable balance

under the new lease rules that went into effect for 2019, the term "finance lease" is a term that applies to which of the following? A. A lessee whose lease is less than 12 months B. a lessor whose lease qualifies as an operating lease C. a lessee whose lease doesn't qualify as a short term or operating lease D. a lessor whose lease doesn't meet the requirements of an operating lease or a sales type lease.

C. a lessee whose lease doesn't qualify as a short term or operating lease

When do you accountant for a sales type lease

If either one of the 5 criteria is met: 1. Transfer of title 2. Purchase option (reasonably certain) 3. Major portion of asset life (75% test) 4. 90% fair value test 5. No alternative use to lessor

which of the following matches a lease with the correct accounting treatment? A. Lessee- Direct financing lease B. Lessor -finance lease C. lessee- sales type lease D. lessor - sales type lease

D. lessor - sales type lease the lessee can account for a lease as either operating lease, finance lease or short term lease the lessor can account for a lease as either operating lease sales type lease or direct financing sales lease (extremely unlikely as of 2019) the terms sales type lease and direct financing lease only apply to lessors, they do not apply to lessee's the term finance lease on applies to lessee not lessor. under the new lease rules, when any one of the five criteria are met for a finance lease, the lessor must use a sales type lease to account for the lease and the lessee must account for the lease as a finance lease.

To recognize COGS

DR: cash (got immediate payment) CR: lease receivable Dr: COGS CR: asset

Interest rate by lessor calculations net method

DR: lease receivable CR: sales revenue

Total impact on income state

Interest income & profit on sale Minus sales revenue (profit) + interest revenue

Calculate interest revenue accrual at year end

Lease receivable beginning balance - minus unearned interest - minus immediate payment = net lease receivable X implicit rate = interest expense accrual JE DR: unearned interest revenue ( contract lease rec) increase net receivable CR: interest income

on Jan 1 year 19, sand corp leases an asset to Barnes with a FV of $103,084 for 3 lease payments of $37,036 each beginning Jan 1 year 19. Sands paid $80,000 for the asset and the implicit rate, known to Barnes is 8%. Barnes has an incremental borrowing rate of 9%. the useful life of the asset is 3 years with no residual value. how will the parties account for this lease?

Lessor sales types lease, lessee finance lease this is a sales type lease for the lessor and finance lease for the lessee because the lease term is for a major part of the assets' life. under the new lease rules, when any one of the five criteria are met for a finance lease, the lessor must use a sales type lease to account for the lease and the lessee must account for the lease as a finance lease

Finance lease

Recognize by Lessee only Has interest expenses Insurance expense Amortization expenses Must meet one of the criteria Purchase option should be a bargain option Lessee use shorter of the amortization life or useful life

How to record sales type lease

Record sales revenue and cost of goods sold Account for the asset as a sale but not actually selling the asset

Profit on sale

Sale amount Minus COGS

interest rate to be used by lessor

lessor recognizes interest revenue based on an interest rate. the lessor always uses the implicit interest rate the mathematical interest rate built into the payments by the lessor. if you recall lessee can use lessor's rate if known and lower. lessor cannot use lessee's rate

sales type lease -lessor

lessor will record "sales revenue" and cost of goods sold with the difference between the two being gross profit for the lessor. asset is not actually being sold (lessor will still own the asset) but the lessor will account for the transaction like a sale provided any of the five criteria are met.

sales type lease

profit on sales and interest revenue income statement impact for the lessor, in the initial year of the lease, will include both profit on sale, and interest income