Sales Type Lease

Accounting by Lessor in which one or more of the four criteria required for a capital lease are met and both of the following criteria are satisfied: (1) collectibility of minimum lease payments is predictable and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred.

Accounting by Lessor in which one or more of the four criteria required for a Capital Lease are met and both of the following criteria are satisfied: (1) collectibility of minimum lease payments is predictable and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. A sales type lease gives rise to a manufacturer's or dealer's profit or loss on the assumed sale of the item in the year of lease as well as interest income over the life of the lease. Lease payments receivable is recorded representing the minimum lease payments (net of amounts, if any, including executory costs with any profit thereon) plus the unguaranteed residual value accruing to the benefit of the lessor. The difference between lease payments receivable and the discounted value of the payments is recorded as unearned interest income. The Discount Rate used to determine the present value of lease payments is the lessor's implicit rate. Assume a sales type lease is entered into on 1/1/2004. Six year-end annual lease payments of $20,000 are to be received. The discount rate is 5%. The present value of an Ordinary Annuity for n = 6, i = 5% is 5.0757. The cost of the leased item is $85,000. Initial direct costs of the lease are $4000. Appropriate journal entries for 2004 and 2005 follow:

See also Direct Financing Lease.