Chapter 10 - Direct Financing Lease-LESSOR

GENERAL RULE:
IF THERE IS A TRANSFER = IGNORE RESIDUAL VALUE
IF THERE IS NO TRANSFER = CONSIDER RESIDUAL VALUE
(REGARDLESS IF GUARANTEED OR UNGUARANTEED)
DIFFERENCE ET!EEN "ROLE#S !ITH GUARANTEED AND
UNGUARANTEED:
- no diference in the computation in Gr$ss In%est&ent and Net
In%est&ent in t'e Lease
- under guaranteed, residual value is considered in computing Gr$ss
"r$(t and the determination of Sa)es an* C$st $+ Sa)es
- under unguaranteed, residual value is ignored in computing Gr$ss
"r$(t and the determination of Sa)es an* C$st $+ Sa)es
- GROSS "ROFIT #UST E THE SA#E UNDER t'e GUARANTEED
AND UNGUARANTEED RESIDUAL VALUE SCENARIO
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LEASED ASSET !ILL REVERT AC, TO LESSOR
Gr$ss In%est&ent = Gross Rentals + Residual Value (hether
guaranteed or unguaranteed! "THE A#OUNT DEITED TO LEASE
RECEIVALE#
= Residual Value is ignored if the lease provides for a
trans+er $+ tit)e
Gr$ss Renta)s = $nnual Gross Rentals % &ease 'erm
Ann-a) Gr$ss Renta)s = (et )nvestment in the lease * +resent Value
of an annuit, of 1 for a num-er of periods
= (Cost of $sset - +V of residual value!*+V of an
annuit, of 1
Net In%est&ent in t'e Lease = "$nnual Rental % +resent Value of
an annuit, of 1 + +V of Residual Value (guaranteed or unguaranteed!#
= or "Cost of the asset + )nitial .irect Cost#
Unearne* Interest Inc$&e = Gross Rental - (et )nvestment
- THE ALANCE IS A REDUCTION TO
LEASE RECEIVALE TO ARRIVE AT ITS CARR.ING A#OUNT
Sa)es = &/01R of 2air Value of $sset or (et )nvestment in the &ease
C$st $+ Sa)es = Cost of $sset + )nitial .irect Cost paid -, &essor
Gr$ss "r$(t = 3ales - Cost of 3ales
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LEASED ASSET !ILL NOT REVERT AC, TO LESSOR /ARGAIN
"URCHASE O"TION OR TRANSFER OF TITLE0
Gr$ss In%est&ent = Gross Rentals + 4argain +urchase /ption "THE
A#OUNT DEITED TO LEASE RECEIVALE#
Gr$ss Renta)s = $nnual Gross Rentals % &ease 'erm
Ann-a) Gr$ss Renta)s = (et )nvestment in the lease * +resent Value
of an annuit, of 1 for a num-er of periods
= (Cost of $sset - +V of 4argain +urchase
/ption!*+V of an annuit, of 1
Net In%est&ent in t'e Lease = "$nnual Rental % +resent Value of
an annuit, of 1 + +V of 4argain +urchase /ption#
= or "Cost of the asset + )niitial .irect Cost#
Unearne* Interest Inc$&e = Gross Rental - (et )nvestment
- THE ALANCE IS A REDUCTION TO
LEASE RECEIVALE TO ARRIVE AT ITS CARR.ING A#OUNT
GUARANTEED
Sa)es = &/01R of 2air Value of $sset or (et )nvestment in the &ease
C$st $+ Sa)es = Cost of $sset + )nitial .irect Cost paid -, &essor
Gr$ss "r$(t = 3ales - Cost of 3ales
UNGUARANTEED
Sa)es = &/01R of 2air Value of $sset or (et )nvestment in the
&ease(e%cluding +V of residual value!
C$st $+ Sa)es = "Cost of $sset - +V of Residual Value #+ )nitial .irect
Cost paid -, &essor
Gr$ss "r$(t = 3ales - Cost of 3ales
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"r$1)e&s 2it' RESIDUAL VALUE AND THE LEASED ASSET !ILL
REVERT AC, TO LESSOR
$nnual Rental is computed as5
(et )nvestment in the &ease - +resent Value of R13).6$& V$&61 = Net
In%est&ent t$ 1e rec$%ere* +r$& RENTAL
(et )nvestment to -e recovered from R1('$&*+resent Value of an
annuit, of 1 for a num-er of periods = Ann-a) Renta)
note5 ignore R13).6$& V$&61 IF THE ASSET !ILL NOT REVERT TO
THE LESSOR
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i+ Fair Va)-e $+ assset is LO!ER t'an RESIDUAL VALUE
under g-arantee*: Cash %% (receive the diference
from lessee + guaranteed residual value!
$sset %% (recorded at the loer of
fair value and carr,ing amount!
&ease Recieva-le %%
under -ng-arantee*: &oss on 7nance lease %% (receive the
diference from lessee + guaranteed residual value!
$sset %% (recorded at the
loer of fair value and carr,ing amount!
&ease Recieva-le %%
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ACTUAL SALE OF LEASED ASSET
C$38 R1C1)V1. - "&1$31 R1C1)V$4&1 - 6(1$R(1. )('1R13' )(C/91
or C$RR:)(G $9/6(' /2 &1$31 R1C1)V$4&1# = Gain or &oss on sale