876 SECTION 3 Financial Instruments and Liabilities UNGUARANTEED RESIDUAL VALUE. The previous example demonstrates that when the residual value is guaranteed, both the lessor and lessee view it as a component of minimum lease payments. But what if the lessee does not guarantee the residual value? From the lessor’s perspective, the residual value is a component of minimum lease payments only if it is guaranteed (by either the lessee or a third-party guarantor). Yet, even if it is not guaranteed, the lessor still expects to receive it. So, if we modify the previous illustration to assume the residual value is not guaranteed, the lessor’s receivable still is $479,079, the present value of the lease payments, including the residual value, so a direct financing lease would be the same as if the residual value is guaranteed. However, the sales revenue is only $445,211—the present value of the minimum lease payments not including the residual value. In other words, sales revenue includes the present value only of the periodic rental payments, not the unguaranteed residual value. Cost of goods sold is similarly reduced by the present value of the unguaranteed residual value, so the initial lessor entry would be modified as follows: The sixth and final depreciation charge increases the balance in accumulated depreciation to $419,079. The equipment is reinstated on the books of the lessor at its fair value at the end of the lease term. The lessor’s minimum lease payments include a residual value only if it is guaranteed (by either the lessee or a third-party guarantor). December 31, 2021 Sans Serif Publishers, Inc. (Lessee) Depreciation expense ($479,079 2 60,000) * ÷ 6 years .......... 69,847 Accumulated depreciation ................................................. 69,847 Interest expense (10% 3 outstanding balance) ......................... 5,458 Lease payable (difference) ....................................................... 54,542 Accumulated depreciation (account balance) .......................... 419,079 Leased equipment (account balance) .................................. 479,079 CompuDec Corporation (Lessor) Inventory of equipment (residual value) ................................... 60,000 Lease receivable (account balance) ..................................... 54,542 Interest revenue (10% 3 outstanding balance) .................... 5,458 *The depreciable cost is reduced by the lessee-guaranteed residual value. Illustration 15–12E End of Lease Term— Actual Residual Value Equals the Guaranteed Amount Sans Serif Publishers, Inc. (Lessee) Leased equipment (present value of lease payments) ........................... 445,211 Lease payable (present value of lease payments) ............................. 445,211 CompuDec Corporation (Lessor) Lease receivable (PV of lease payments plus PV of $60,000 residual value) ....................................................................................... 479,079 Cost of goods sold ($300,000 2 33,868) ............................................ 266,132 Sales revenue ($479,079 2 33,868)* .............................................. 445,211 Inventory of equipment (lessor’s cost) ............................................. 300,000 *Also can be calculated as the present value of the lessor’s minimum lease payments, which does not include the unguaranteed residual value. Sales revenue does not include the unguaranteed residual value because the revenue to be recovered from the lessee is lease payments only. The remainder of the lessor’s investment is to be recovered—not from payment by the lessee (as is presumed when the residual value is guaranteed), but by selling, re-leasing, or otherwise obtaining value from the asset when it reverts back to the lessor. You might want to view the situation this way: The portion of the asset sold is the portion not represented by the unguaranteed residual value. So, both the asset’s cost and its selling price are reduced by the present value of the portion not sold. When the lessee doesn’t guarantee the residual value, the lessee’s net liability ($445,211) and the lessor’s net receivable ($479,079) will differ because the lessee does not include the unguaranteed residual amount.
Spiceland_Inter_Accounting8e_Ch15
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