SALES TYPE LEASE-

LESSOR
RANDEL COMBO
LESSOR IS A SALES TYPE LEASE

CAR REAL ESTATE

DEALERSHIP
 • GROSS INVESTMENTS- This is equal to the gross
rentals for the entire lease term plus the absolute amount
of the residual value
• NET INVESTMENT- This is equal to the present value
DEFINA of the gross rentals plus the present value of the residual
value

TION • UNEARNED INTEREST INCOME- This is the

difference between the gross investment and net
investment in the lease

OF • SALES- The amount is equal to the net investment in the

lease or fair value of the asset, whichever is lower.

TERMS • COST OF GOODS SOLD- This is equal to the cost of the

asset sold minus the present value of unguaranteed
residual value plus the initial direct cost paid by the lessor
• GROSS PROFIT- This is the usual formula of sales
minus cost of goods sold
 ILLUSTRATION 1
Lessor Company is a dealer in machinery Computation
On January 1, 2020, a machinery was leased to lessee
Gross rentals (400,000 x 5) 2,000,000.00
company with the following provisions:
Annual rental payable 400,000 PV of Rentals (400K x 3.60) 1,440,000.00
Lease term 5 years Unearned Interest Income 560,000.00
Useful life of machinery 5 years
Cost of machinery 1,000,000
PV of Rental - Sales 1,440,000.00
Implicit interest rate 12%
PV of annuity of 1 for 5 years at 12% 3.60 Cost of Machinery 1,000,000.00

Gross profit on sales 440,000.00

A manufacturer lessor shall recognize selling profit or
loss in income for the period in accordance with the
policy followed by the entity for outright sale.
ILLUSTRATION 1
Journal Entries
Computation
1. To record the sales:
Lease receivable 2,000,000
Sales 1,440,000 Present Value - 1/1/2020 1,440,000.00
Unearned interest income 560,000
December 31, 2020:
2. To record the cost of goods sold, assuming the perpetual
system is used:
Payment 400,000.00
Cost of goods sold 1,000,000
Inventory 1,000,000
Interest for 2020* 172,800.00 227,200.00
3. To record the collection of the annual rental
Cash 400,000
Lease receivable 400,000 Balance- 12/31/2020 1,212,800.00
4. To record the interest income for 2020
Unearned interest income 172,800
Interest Income 172,800 *(12% x 1,440,000)
 Residual Value Guarantee
Gross Rentals (800k x 5) 4,000,000.00
ILLUSTRATION 2 with residual value Residual Value guarantee 200,000.00
Lease receivable- Gross Investment 4,200,000.00
Lessor Company is a dealer in machinery
On January 1, 2020, a machinery was leased to lessee PV of Gross Rental (800k x 3.7908) 3,032,640.00
company with the following provisions: PV of Residual Value (200k x .6209) 124,180.00
PV- net investment 3,156,820.00
Annual rental payable 800,000
Lease Receivable 4,200,000.00
Lease term 5 years
Present Value 3,156,820.00
Useful life of machinery 5 years Unearned interest income 1,043,180.00
Cost of machinery 2,000,000 Present Value 3,156,820.00
Estimated residual value 200,000 Cost of Good Sold - 2,000,000.00
Initial direct cost - 100,000.00
Initial direct cost paid 100,000 Gross Income 1,056,820.00
Implicit interest rate 10%
Journal Entries 1/1/2020
PV of annuity of 1 for 5 years at 10% 3.7908
Lease receivable 4,200,000.00
PV of 1 for 5 periods at 10% 0.6209 Cost of goods sold 2,100,000.00
Sales 3,156,820.00
At the end of the lease term on 12/31/2024. the Unearned interest income 1,043,180.00
machinery will revert to lessor company. Inventory 2,000,000.00
Cash 100,000.00
 Unguaranteed Residual Value
ILLUSTRATION 2 with residual value Gross Rentals (800k x 5) 4,000,000.00
Residual Value guarantee 200,000.00
Lease receivable- Gross Investment 4,200,000.00
Residual Value Guarantee
Gross Rentals (800k x 5) 4,000,000.00
Residual Value guarantee 200,000.00
Lease receivable- Gross Investment 4,200,000.00 PV of Gross Rental (800k x 3.7908) 3,032,640.00

PV of Gross Rental (800k x 3.7908) 3,032,640.00 PV of Residual Value (200k x .6209) 124,180.00
PV of Residual Value (200k x .6209) 124,180.00 PV- net investment 3,156,820.00
PV- net investment 3,156,820.00
Lease Receivable 4,200,000.00
Lease Receivable 4,200,000.00 Present Value 3,156,820.00
Present Value 3,156,820.00 Unearned interest income 1,043,180.00
Unearned interest income 1,043,180.00
Cost of Machinery 2,000,000.00
Present Value 3,156,820.00
Cost of Good Sold - 2,000,000.00
Initial direct cost - 100,000.00 PV of Unguaranteed RV (200k x .6209) - 124,180.00
Gross Income 1,056,820.00 Cost of Good Sold 1,875,820.00

Present Value 3,032,640.00

Cost of Good Sold - 1,875,820.00
Initial direct cost - 100,000.00
Gross Income 1,056,820.00
 ILLUSTRATION 2 with residual value
Table of Amortization
Date Payment Interest Principal Present Value
01/01/2020       3,156,820.00
12/31/2020 800,000.00 315,682.00 484,318.00 2,672,502.00
12/31/2021 800,000.00 267,250.20 532,749.80 2,139,752.20
12/31/2022 800,000.00 213,975.22 586,024.78 1,553,727.42
12/31/2023 800,000.00 155,372.74 644,627.26 909,100.16
12/31/2024 800,000.00 90,910.02 709,089.98 200,010.18
         

Journal Entries 12/31/2020

Assume on December 31, 2024, Fair Value of the Machinery is only
Cash 800,000.00 150,0000
Lease receivable 80,000.00
Guaranteed
Cash 50,000.00
Unearned interest income 315,682.00
Interest Income 315,682.00 Machinery 150,000.00
Lease receivable 200,000.00
Unguaranteed
Journal Entries 12/31/2024
Loss on Finance Lease 50,000.00
Machinery 200,000.00 Machinery 150,000.00
Lease receivable 200,000.00 Lease receivable 200,000.00
ILLUSTRATION 3- SL Purchase Option
Computation
Lessor Company is a dealer in machinery Gross rentals (500k x 4) 2,000,000.00
On January 1, 2020, a machinery was leased to lessee Purchase Option 200,000.00
company with the following provisions: Gross Investment 2,200,000.00

Annual rental payable 500,000 PV of Gross rental (500k x 3.312) 1,656,000.00

Lease term 4 years PV of Purchase option (200k x .735) 147,000.00
PV Net investment 1,803,000.00
Useful life of machinery 5 years
Gross Investment 2,200,000.00
Cost of machinery 1,000,000
PV Net investment 1,803,000.00
Purchase option 200,000 Unearned Interest income 397,000.00
Initial direct cost paid 100,000 PV Net investment 1,803,000.00
Implicit interest rate 8% Cost of Goods sold* 1,100,000.00
Gross Income 703,000.00
PV of annuity of 1 for 4 years at 8% 3.312
PV of 1 for 4 periods at 8% 0.735 Cost of Equipment 1,000,000.00
Initial Direct Cost 100,000.00
It is reasonably certain that the lessee will exercise the Cost of Goods sold* 1,100,000.00
purchase option on 12/31/2023.
 ILLUSTRATION 3- SL Purchase Option
Journal Entries 1/1/2020
Lease receivable 2,200,000.00 Journal Entries 12/31/2020
Cost of goods sold 1,100,000.00 Cash 500,000.00
Lease receivable 500,000.00
Sales 1,803,000.00
Unearned interest income 397,000.00 Unearned interest income 144,240.00
Inventory 1,000,000.00 Interest Income 144,240.00
Cash 100,000.00

Table of Amortization
Date Payment Interest Principal Present Value
01/01/2020       1,803,000.00
12/31/2020 500,000.00 144,240.00 355,760.00 1,447,240.00
12/31/2021 500,000.00 115,779.20 384,220.80 1,063,019.20
12/31/2022 500,000.00 85,041.54 414,958.46 648,060.74
12/31/2023 500,000.00 51,844.86 448,155.14 199,905.59
SALE AND LEASEBACK
RANDEL COMBO
 • Is an arrangement whereby one party
sells an asset to another party and
then immediately leases the asset
Sale and back from the new owner.
Tax Advantage
leasebac Cash Flow
k
 ILLUSTRATION 1 SP @ Fair
value BOOKS OF SELLER- LESSEE
1 To record the sales:
At the beginning of the current year, an entity Cash 2,000,000.00
sold a machinery with a remaining life of 10 Accumulated Depreciation 1,200,000.00
years for 2,000,000 which is equal to the fair Machinery 3,000,000.00
Gain on right Transferred 200,000.00
value of the machinery.
2 To record annual rental
Rent expense 300,000.00
The entity immediately leased the machinery Cash 300,000.00
back for 1 year at the prevailing annual rental
of 300,000. BOOKS OF BUYER- LESSOR
1 To record the purchase:
Machinery 2,000,000.00
Cash 2,000,000.00
The Machinery has carrying amount of
1,800,000, net of accumulated depreciation of 2 To record the annual rental:
1,200,000. Cash 300,000.00
Rent Income 300,000.00

3 To record Depreciation
Depreciation 200,000.00
Accumulated depreciation 200,000.00
 ILLUSTRATION 2 SP @ Fair
value
On January 1, 2020, an entity sold an equipment with remaining life of 10 Gain or Loss to be Recognized
years and immediately leased it back for 4 years at the prevailing market Sale price at Fair Value 6,000,000.00
rental. Carrying amount 4,500,000.00
Sales Price at Fair Value 6,000,000 Total Gain 1,500,000.00
Carrying amount of Equip 4,500,000 Sale price at Fair Value 6,000,000.00
Annual Rental 800,000 PV of Rental (800k x 3.17) 2,536,000.00
Right transferred to buyer- lessor 3,464,000.00
Implicit interest rate 10%
PV ordinary annuity at 10% for 4 period 3.170 Gain to be recognized 866,000.00
(3464/6000 * 1,500,000)
PV of rental (800k x 3.17) 2,536,000
Cost of right to use asset
(2536/6000 * 4,500,000) 1,902,000.00
Table of Amortization
Date Payment Interest Principal Present Value
01/01/2020       2,536,000.00
12/31/2020 800,000.00 253,600.00 546,400.00 1,989,600.00
12/31/2021 800,000.00 198,960.00 601,040.00 1,388,560.00
12/31/2022 800,000.00 138,856.00 661,144.00 727,416.00
12/31/2023 800,000.00 72,741.60 727,258.40 -
 ILLUSTRATION 2 SP @ Fair
value

BOOKS OF SELLER- LESSEE BOOKS OF BUYER- LESSOR

1To record the sales: 1To record the purchase:
Cash 6,000,000.00 Equipment 6,000,000.00
Right of use asset 1,902,000.00 Cash 6,000,000.00
Equipment 4,500,000.00
Lease liability 2,536,000.00 2To record the annual rental:
Gain on right Transferred 866,000.00 Cash 800,000.00
Rent Income 800,000.00
2To record annual rental
Interest expense 253,600.00 3To record Depreciation
Lease liability 546,400.00 Depreciation 600,000.00
Cash 800,000.00 Accumulated depreciation 600,000.00

3To record Right to used asset

Depreciation (1,902k /4 Years) 475,500.00
Accmulated Depreciation 475,500.00
ILLUSTRATION 3 SP @ Above Fair value

On January 1, 2020, an entity sold an building with remaining life of

20 years and immediately leased it back for 5 years.
Sales Price 20,000,000
Fair Value of BLDG 18,000,000
Carrying amount of BLDG 10,800,000
Annual Rental 1,500,000
Implicit interest rate 12%
PV ordinary annuity at 12% for 5 period 3.60
PV of rental (1,500k x 3.60) 5,400,000
 ILLUSTRATION 3 SP @ Above Fair value
BOOKS OF SELLER- LESSEE
BOOKS OF BUYER- LESSOR
1To record the sales:
1To record the purchase:
Cash 20,000,000.00
Building 18,000,000.00
Right of use asset 2,040,000.00
Financial Asset 2,000,000.00
Building 10,800,000.00
Cash 20,000,000.00
Lease liability 5,400,000.00
Gain on right Transferred 5,840,000.00
2To record the annual rental:
Cash 944,444.00
2To record annual rental
Rent Income 944,444.00
Interest expense 648,000.00
Lease liability 852,000.00
Cash 1,500,000.00 3To record Financial asset
Cash 555,555.00
Financial asset 315,556.00
3To record Right to used asset Interest Income 240,000.00
Depreciation (2040k /5 Years) 408,000.00
Accmulated Depreciation 408,000.00
3To record Depreciation
Depreciation 900,000.00
Accumulated depreciation 900,000.00
ILLUSTRATION 3 SP @ Fair value with loss

On January 1, 2020, an entity sold an building with remaining life of

25 years and immediately leased it back for 3 years.
Sales Price at Fair value 10,000,000
Carrying amount of BLDG 12,000,000
Annual Rental 500,000
Implicit interest rate 8%
PV ordinary annuity at 8% for 3 period 2.58
PV of rental (500k x 2.58) 1,290,000
 ILLUSTRATION 3 SP @ Fair value with loss
BOOKS OF SELLER- LESSEE BOOKS OF BUYER-
1To record the sales: LESSOR
Cash 10,000,000.00 1To record the purchase:
Right of use asset 1,548,000.00 Building 10,000,000.00
Loss of Right transferred 1,742,000.00 Cash 10,000,000.00
Building 12,000,000.00
Lease liability 1,290,000.00 To record the annual
2 rental:
2To record annual rental Cash 500,000.00
Interest expense 103,200.00 Rent Income 500,000.00
Lease liability 396,800.00
Cash 500,000.00 3To record Depreciation
Depreciation 400,000.00
3To record Right to used asset Accumulated
depreciation 400,000.00
Depreciation (1548k /3 Years) 516,000.00
Accmulated
Depreciation 516,000.00