S. Lessee leases asset from Lessor. Lease terms is for 5 years. Lease payments o

Question

S. Lessee leases asset from Lessor. Lease terms is for 5 years. Lease payments of 10,000 are made annually on December 31. Lease inception date is January 1. BV of leased asset on Lessor's books is 53,070.57. This is also the FMV of the asset. Lessor believes the asset will be worth $30,000 at lease-end and Lessee guarantees this residual value. Lessee believes the residual value at lease-end will be closer to $14,000, and thus expects to make a deficiency payment to Lessor of $16,000 at lease-end. Assume the lease qualifies as a Financing lease to Lessee and a Sales lease to Lessor. How much will Lessor debit to "Investment in Lease" asset account at inception of the lease? How much will Lessee credit to "Lease Liability" liability account at inception of lease? The Lessor's implicit rate of interest is 12% and this rate is known by Lessee.

Explanation / Answer

In case of a finance lease, the Lesse will record an Asset at the present value of minimum lease payments. When the lease agreement includes payment of a guaranteed residual value, this portion is also considered as a financial asset.

The Lessor would consider the annual lease payments and guaranteed residual value to record the asset at $53,070.87

The lessee would consider the present value of lease payments and the net amount (deficiency) to record a liability for $45,126.59

Year Amount PV Factor @12% PV 1 10000 0.892857        8,928.57 2 10000 0.797194        7,971.94 3 10000 0.71178        7,117.80 4 10000 0.635518        6,355.18 5 10000 0.567427        5,674.27 5 30000 0.567427      17,022.81 Total      53,070.57

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