Chapter 13 - Direct Financing - Lessor - 2024

Direct Financing
Lessor
Chapter 13
September 5, 2024
Outline
01 Classification 03 Direct Financing -

Basic
02 Accounting
Considerations 04 Direct Financing –
with IDC
Outline
05 With Residual
Value 0
06 With transfer
of title to
lease
Technical Knowledge
● To know the finance lease classification on the part
of lessor.
● To define a direct financing lease.
● To distinguish a direct financing lease from a sales
type lease.
● To understand gross investment and net investment
in a direct financing lease.
● To recognize interest income in a direct financing
lease using the effective interest method.
Finance Lease Classification
a.) Direct Financing
• The lessor is engaged in financing business.
• Income is in the form of interest income.
b.) Sales Type Lease
• The lessor is a manufacturer or dealer that uses the lease as a means of

facilitating the sales of its product.
• Lessor recognizes manufacturer’s or dealer’s profit plus interest income.

Important Considerations:
Refer to the first Illustrative Problem (page 402 to 403)
1.) Gross investment

○ Equal to the gross rentals for the
entire lease term plus the absolute
amount of the residual value,
whether guaranteed or
unguaranteed
○ The amount debited to lease
receivable
2.) Net investment in the lease
○ Cost of the asset plus any initial cost paid by the lessor
3.) Unearned interest income

○ Total financial revenue of the lessor which is the difference
between the gross investment and net investment in the lease

4.) Initial direct cost (Refer to the second Illustration)
○ Added to the cost of the asset to get the net investment in the
lease
○ Effectively spread the initial direct cost over the lease term and
reduce the amount of interest income; interest is therefore

recomputed
5.) Determination of Annual Rental
○ Net investment in the lease or cost of the asset divided by present
value factor for an annuity of 1 for a number of periods using a
desired rate of return to get the annual rental
Basic Procedures
1. Prepare JE to 2. Prepare 3. Record the

record the FL table of amort. Payment
• Debit LR • The same with the • Debit Cash
• Credit Asset table of the Lessee. • Credit LR
• Credit UII
Basic Procedures
4. Record the
amortization of UII
• Debit UII
• Credit Int. Income
03
Basic; Advance Payment
(Think-Pair-Share)
Date Payment Interest Principal Present Value
1/1/2023 403,700
1/1/2023 100,000 100,000 303,700
1/1/2024 100,000 36,444 63,556 240,144
1/1/2025 100,000 28,817 71,183 168,961
04
With Initial Direct Cost
4.) Initial direct cost

o Added to the cost of the asset to get the net investment in
the lease
○ Effectively spread the initial direct cost over the lease term and
reduce the amount of interest income; interest is therefore
recomputed
Problem 13-1 (Iceberg)
05
With Residual Value
With residual value
● If the asset will revert to the lessor at the end of the
lease term, the present value of the residual value is
deducted from the cost of the asset--- net
investment to be recovered from rental
● If the asset will not revert to the lessor, the residual
value is completely ignored
● Gross investment (lease receivable) should include
the residual value whether guaranteed of
unguaranteed (Gross rentals + Residual Value)
Problem 13-2 (Camia Company)
Problem 13-2 (Camia Company)
What if the RV is guaranteed?
What if the title to the asset is transferred to
the lessee?
06
Transfer of Title to Lessee
Problem 13-13 (Irene Company)
Problem 13-13 (Irene Company)
Problem 13-3 (Macedonia Company)
Multiple Choice
Cost of Equipment 4,361,200

Less: PV of RV (200T x 0.466) 93,200
Net investment 4,268,000 C
Net investment 4,268,000

Divided by PV factor /5.335
Annual Rental 800,000 A
Multiple Choice
Cost of Equipment 4,361,200

Implicit Interest rate x 10%
Interest Income 436,120 A
Multiple Choice
Net Lease receivable (Cost of the machine) 6,000,000 C
Gross Rentals (1,750T x 5) 8,750,000

Residual Value 275,000
Gross Investment 9,025,000 B
Multiple Choice
Gross Investment 9,025,000

Net Lease receivable (Cost of the machine) 6,000,000
Total Unearned Interest Income 3,025,000 A
Net Lease receivable (Cost of the machine) 6,000,000

Implicit Interest rate x 15%
Interest Income 900,000 C
Multiple Choice
13 – 6 13-14
1. A 1. A
2. B 2. B
3. B 3. C
4. C 4. B
5. C
13-7 6. C
1. A 7. D
2. B 8. C
3. A 9. A
4. B 10. D
13-8 C
13-9 B
13-10 A
13-11 C
13-12 C
Assignment
● 14-6 (Group of Tayong)
● 14-7 (Group of Gramatica)
● 14-8 (Group of Kintanar)
end

Chapter 13 - Direct Financing - Lessor - 2024

Uploaded by

Copyright:

Available Formats

Chapter 13 - Direct Financing - Lessor - 2024

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 13 - Direct Financing - Lessor - 2024

Uploaded by

Copyright:

Available Formats

Direct Financing

01 Classification 03 Direct Financing -

• The lessor is engaged in financing business.

• Income is in the form of interest income.

b.) Sales Type Lease

• The lessor is a manufacturer or dealer that uses the lease as a means of

• Lessor recognizes manufacturer’s or dealer’s profit plus interest income.

1.) Gross investment

3.) Unearned interest income

between the gross investment and net investment in the lease

reduce the amount of interest income; interest is therefore

1. Prepare JE to 2. Prepare 3. Record the

4.) Initial direct cost

Cost of Equipment 4,361,200

Net investment 4,268,000

Cost of Equipment 4,361,200

Net Lease receivable (Cost of the machine) 6,000,000 C

Gross Rentals (1,750T x 5) 8,750,000

Gross Investment 9,025,000

Net Lease receivable (Cost of the machine) 6,000,000

You might also like