868 SECTION 3 Financial Instruments and Liabilities asset (usually the present value of the minimum lease payments, or “selling price”) exceeds the cost or book value of the asset sold. Accounting for a sales-type lease is the same as for a direct financing lease except for recognizing the profit at the inception of the lease. 20 To illustrate, let’s modify our previous illustration. Assume all facts are the same except Sans Serif Publishers leased the equipment directly from CompuDec Corporation, rather than through the financing intermediary. Also assume CompuDec’s cost of the equipment was $300,000. If you recall that the lease payments (their present value) provide a selling price of $479,079, you see that CompuDec recognizes a gross profit on the sale of $479,079 2 300,000 5 $179,079. This sales-type lease is demonstrated in Illustration 15–8 . Note 1 (in part) HP records revenue from the sale of equipment under sales-type leases as product revenue at the inception of the lease. 20 It is possible that the asset’s book value will exceed its fair value, in which case a dealer’s loss should be recorded. FINANCIAL Reporting Case Q2, p. 853 Sales revenue $479,079 – COGS 300,000 Dealer’s profit $179,079 Remember, no interest has accrued when the first payment is made at the inception of the lease. Recording a salestype lease is similar to recording a sale of merchandise on account: On January 1, 2016, Sans Serif Publishers, Inc., leased printing equipment from CompuDec Corporation at a price of $479,079. The lease agreement specifies annual payments of $100,000 beginning January 1, 2016, the inception of the lease, and at each December 31 thereafter through 2020. The six-year lease term ending December 31, 2021, (a year after the final payment) is equal to the estimated useful life of the equipment. CompuDec manufactured the equipment at a cost of $300,000. CompuDec’s interest rate for financing the transaction is 10%. Sales-Type Lease * CompuDec Corporation (Lessor) Lease receivable (present value of lease payments) ........................... 479,079 Cost of goods sold (lessor’s cost) ..................................................... 300,000 Sales revenue (present value of lease payments) ........................... 479,079 Inventory of equipment (lessor’s cost) .......................................... 300,000 First Lease Payment * CompuDec Corporation (Lessor) Cash .................................................................................................. 100,000 Lease receivable .......................................................................... 100,000 *Of course, the entries to record the lease and the first payment could be combined into a single entry: Lease receivable ($479,079 2 $100,000) ........................... 379,079 Cost of goods sold ............................................................. 300,000 Cash .................................................................................... 100,000 Sales revenue .................................................................. 479,079 Inventory of equipment ................................................... 300,000 Illustration 15–8 Sales-Type Lease You should recognize the similarity between recording both the revenue and cost components of this sale by lease and recording the same components of other sales transactions. As in the sale of any product, gross profit is the difference between sales revenue and cost of goods sold. Hewlett-Packard Company “sells” some of its products using sales-type leases and disclosed the following in a recent annual report: A/R ............... {price} Sales rev .... {price} COGS ............ {cost} Inventory ... {cost} All entries other than the entry at the inception of the lease, which includes the gross profit on the sale, are the same for a sales-type lease and a direct financing lease. Accounting by the lessee is not affected by how the lessor classifies the lease. All lessee entries are precisely the same as in the previous illustration of a direct financing lease. Real World Financials
Spiceland_Inter_Accounting8e_Ch15
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