scan0034.rtf

e. Effective interest method: Allocates each lease payment between principle and interest. C. Lessors. (Illustrative example problem) 1. Benefits a. Interest revenue b. Tax incentives c. High residual value 2. Classification by the lessor. Discuss group I and group II criteria. a. Operating Leases. (P22-2) b. Direct Financing Leases. (E22-5) c. Sales-Type Leases: Existence of a dealer's or manufacturer's profit. . (P22-10) 4. Direct Financing Method. a. Information necessary to record a direct financing lease includes: (1) Gross Investment: Minimum lease payments plus the unguaranteed residual value. (2) Unearned Interest Income: Difference between gross investment and cost of asset (which is equal to fair market value for a direct financing lease). Amortized over lease term using the effective interest method. (3) Net Investments: Gross investment less the unearned interest income. b. Lease payments receivable. Equal to minimum lease payments. 5. Sales-type Leases. a. Information necessary to record a sales-type lease includes: (1) Gross Investment: Minimum lease payments plus the unguaranteed residual value. (2) Unearned Interest Income: Gross investment less the fair market value of the asset. (3) Sales Price: Present value of the minimum lease payments. (4) Cost of Goods Sold: Cost of the asset to the lessor, less the present value of any unguaranteed residual value. b. Manufacturer's or dealer's gross profit. The difference between sales price and cost of goods sold. (1) Is the same whether a guaranteed or unguaranteed residual value is involved. (2) However, sales and cost of goods sold will differ.