920 SECTION 3 Financial Instruments and Liabilities Lease receivable (present value of lease payments) .......................... 479,079 Inventory of equipment (lessor’s cost: book value) ...................... 300,000 Profit (difference) ......................................................................... 179,07940 40Companies might choose to separate this profit into its two components: Sales revenue ($479,079) and cost of goods sold ($300,000), which is the gross method demonstrated for “sales-type” leases in the main chapter: Lease receivable (present value of lease payments) .................................. 479,079 Cost of goods sold ...................................................................................... 300,000 Sales revenue ......................................................................................... 479,079 Inventory of equipment (lessor’s cost: book value) ............................... 300,000 Exception: A lessor cannot recognize sales profit (or revenue) at the beginning of any lease that doesn’t transfer “control” of the underlying asset to the lessee. Illustration 15–24 (concluded) a Type A lease, and the accounting would be quite similar to current GAAP. Conceptually, though, we think of the asset that Sans Serif “purchases” to be, not printing equipment, but the right to use the printing equipment, in this case, for its entire useful life. That’s why Sans Serif records a “right-of-use asset.” First LeaseCorp, the lessor, also would classify this arrangement as a Type A lease and record it as if it were an installment sale (like a capital lease under current GAAP). That is, it would record a lease receivable for the present value of the payments and remove from its balance sheet the asset being leased. RECORDING INTEREST EXPENSE / INTEREST REVENUE As lease payments are made over the term of the lease, both the lessee and lessor record interest at the effective interest rate. The lessee, Sans Serif, also will record amortization expense on its right-of-use asset over the term of the lease. Let’s first consider interest. As shown in Illustration 15–24A , the entire $100,000 first lease payment is applied to principal (lease payable/receivable) reduction. 41 That’s because the payment occurred at the beginning of the lease, so no interest had yet accrued. Subsequent lease payments, though, include interest of 10% on the outstanding balance as well as a portion that reduces that outstanding balance. As of the second lease payment date, one year’s interest of $37,908 has accrued on the $379,079 ($479,079 2 100,000) balance outstanding during 2016. After recording that interest, the outstanding balance is reduced by $62,092, the portion of the $100,000 payment remaining after interest is covered. GAAP Change Interest accrues at the effective rate on the balance outstanding during the period. 41 Another way to view this is to think of the first $100,000 as a down payment with the remaining $379,079 financed by 5 (i.e., 6 – 1) year-end lease payments. Illustration 15–24A Journal Entries for the First and Second Lease Payment First Lease Payment (January 1, 2016) Sans Serif (Lessee) Lease payable .......................................................................... 100,000 Cash (lease payment) ........................................................... 100,000 First LeaseCorp (Lessor) Cash (lease payment) ................................................................ 100,000 Lease receivable ................................................................. 100,000 Second Lease Payment (December 31, 2016) Sans Serif (Lessee) Interest expense 10% 3 ($479,079 2 100,000 ) ..................... 37,908 Lease payable (difference) ....................................................... 62,092 Cash (lease payment) ....................................................... 100,000 First LeaseCorp (Lessor) Cash (lease payment) ................................................................ 100,000 Lease receivable ............................................................. 62,092 Interest revenue 10% 3 ($479,079 2 100,000) ............... 37,908 Lease payable/receivable $ 479,079 (100,000) 1st payment $ 379,079 (62,092) 2nd payment $ 316,987
Spiceland_Inter_Accounting8e_Ch15
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