B.

Sales Type Lease (LESSOR)

Computations/ Formulas:
Gross Investment= gross rentals for entire lease term + residual value whether guaranteed or not + bargain purchase
option, if any*
*If there is a residual value, it means there is no transfer of title; thus no bargain purchase option.
**Net Investment= Present value of rental payments + Present value of residual value whether guaranteed or not +
Present value of bargain purchase option, if any.
**Net investment is also equal to Lease receivable, net per balance sheet at the inception/beginning of the lease. (Gross
receivables less unearned interest income)
TAKE NOTE: The present value of Gross investment is equal (close) to net investment using the implicit rate.
Unearned interest income= Gross Investment less Net investment
Interest income = Lease receivables, net (at the beginning) multiply by implicit rate
Sales= present value of rental payments + PV of GUARANTEEDresidual value + PV of bargain purchase option, if any OR
fair value of asset –whichever is LOWER
Cost of sales= cost of asset + initial direct cost – PV of unguaranteed residual value, if any
Gross profit/income= Sales – cost of sales

Example; Sales Type Lease

Annual rental is P 800,000 payable at the end of each year; Cost of machine is P 2,000,000; rate is 10%; Residual value is P
200,000 and Initial Direct cost is 100,000. Lease term is 5 years.
PV of an ordinary annuity of 1 at 10 for 5 periods is 3.7908
PV of 1 at 10% for 5 periods is .6209

Formula
Scenario 1: If Guaranteed Residual value
A. Gross Investment
(800K*5)+200K = 4,200,000
B. Net Investment
(800K*3.7908)+(200*.6209)= 3,156,820
C. Unearned interest income
A minus B =1,043,180
D. Lease receivable, net at beginning
A minus C= 3,156,820
E. Interest income in 1st yr
D multiply by 10%= 315,682
F. Sales
See formula above= 3,156,820
G. Cost of Sales
See formula above= 2,100,000
H. Gross profit
F minus G= 1,056,820

Example; Sales Type Lease (SAME DATA above, except that the residual value is UNGUARANTEED))
Annual rental is P 800,000 payable at the end of each year; Cost of machine is P 2,000,000; rate is 10%; Residual value is P
200,000 and Initial Direct cost is 100,000. Lease term is 5 years.
PV of an ordinary annuity of 1 at 10 for 5 periods is 3.7908
PV of 1 at 10% for 5 periods is .6209

Formula
Scenario 2: If Unguaranteed Residual value E. Interest income in 1st yr
A. Gross Investment D multiply by 10%= 315,682
(800K*5)+200K =4,200,000 F. Sales
B. Net Investment See formula above= 3,032,640
(800K*3.7908)+(200*.6209)= 3,156,820 G. Cost of Sales
C. Unearned interest income See formula above= 1,975,820
A minus B= 1,043,180 H. Gross profit
D= Lease receivable, net at beginning F minus G= 1,056,820
A minus C= 3,156,820