Sales Type Lease with Guaranteed and Unguaranteed Residual

France Company is a dealer in equipment. At the beginning of the current year, an equipment was leased to another entity w

Annual rental payable at the end of each year

Lease term and useful life of machinery
Cost of Equipment
Residual value - unguaranteed
Implicit Interest Rate
PV of an ordinary annuity of 1 at 12% for 5 periods
PV of 1 at 12% for 5 periods

At the end of lease term the equipment will revert to the lessor.
The entity incurred initial direct cost of P200,000 in finalizing the lease agreement.

Step 1: Find Gross Investment (Lease Receivable)

and Net Investment (Total Present Value)

Gross Rental (1,500,000 x 5)

Add: Residual Value (Guaranteed or Unguaranteed)
Lease Receivable - Gross Investment

Present Value of Gross Rentals (1,500,000 x 3.60)

Present Value of residual value Guarantee or Unguarantee (500,000 x 0.57)
Total Present Value - Net Investment

Step 2: Compute for Unearned Interest Income

Lease Receivable
Total Present Value
Unearned Interest Inccome

Step 3: Look for Gross Profit

Sales equal to Net Investment

Less: Cost of Goods Sold
Initial Direct Cost
Gross Profit

Computation of Sales
PV of gross rentals
PV of guaranteed/unguaranteed residual value
Sales - Net Investment - Total Present Value
 Computation of Cost of Goods Sold
Cost of Equipment
PV of unguaranteed/unguaranteed residual value
Less: Initial Direct Cost
Cost of Goods Sold

Journal Entries

Lease Receivable
Cost of Goods Sold
Sales
Unearned Interest Income
Inventory

Cost of Goods Sold

Cash

Step 4: Create the table of amortization

Column1 Column2 Column3 Column4 Column5

Step 5: Accounting Entries

Dec. 31, 2020 Cash

Lease Receivable

Unearned Interest income

Interest Income

dec. 31, 2021 Cash

Lease Receivable

Unearned Interest Income

Interest Income

dec. 31, 2022 Cash

Lease Receivable

Unearned Interest income

Interest Income

dec. 31, 2023 Cash

Lease Receivable
 Unearned Interest income
Interest Income

de. 31, 2024 Cash

Lease Receivable

Unearned Interest income

Interest Income

Step 6: Return of Asset to the lessor

Whether Guaranteed or Unguaranteed residual value, the entry on the books of the lessor will be the same
Inventory
Lease Receivable

Assume on December 31, 2024, end of lease term, the fair value of the equipment is only 100,000.

Guaranteed Residual Value

Cash
Inventory
Lease Receivable

Unguaranteed Residual Value

Loss on finance lease
Inventory
Lease Receivable

Question 1: What is the gross investment in the lease?

a. 7,500,000
b. 8,000,000
c. 4,000,000
d. 4,500,000

Question 2: What is the net investment in the lease

a. 5,400,000
b. 5,685,000
c. 4,000,000
d. 3,500,000

Question 3: What interest income should be reported for current year?

a. 682,200
b. 648,000
c. 900,000
d. 960,000
Question 4: What amount should be reported as gross profit on sale?
a 1,485,000
b. 1,685,000
c. 3,500,000
d. 4,000,000
nd Unguaranteed Residual Value
t year, an equipment was leased to another entity with the following provisions:

1,500,000
5 years
4,000,000
500,000
12%
3.60
0.57

Guaranteed Residual Value Unguaranteed Residual Value

7,500,000 7,500,000
500,000 500,000
8,000,000 8,000,000

5,400,000 5,400,000
e (500,000 x 0.57) 285,000 285,000
5,685,000 5,685,000

8,000,000 8,000,000
5,685,000 5,685,000
2,315,000 2,315,000

5,685,000 5,400,000
-4,000,000 -3,715,000
-200,000 -200,000
1,485,000 1,485,000

5,400,000 5,400,000
285,000
5,685,000 5,400,000
 4,000,000 4,000,000
-285,000
-200,000 -200,000
3,800,000 3,515,000

Debit Credit Debit

8,000,000 8,000,000
4,000,000 4,000,000
5,685,000
2,315,000
4,000,000

200,000 200,000
200,000

1,500,000 "
1,500,000

682,200 "
682,200

1,500,000 "
1,500,000

584,064 "
584,064

1,500,000 "
1,500,000

474,158.68 "
464,158.68

1,500,000 "
1,500,000
 351,049.88 "
351,059.88

1,500,000 "
1,500,000

213,175.87 "
213,175.87

ooks of the lessor will be the same

200,000 200,000
200,000

uipment is only 100,000.

400,000
100,000
500,000

400,000
100,000
500,000
excluding PV of unguaranteed residual value
 Credit

5,400,000
2,315,000
4,000,000

200,000

"

"

"

"

"

"

"
"

"

"

200,000
Amortization Table

Date Payment Interest Principal

1/1/2020
12/31/20 1,500,000 682,200 817,800
12/31/21 1,500,000 584,064 915,963
12/31/22 1,500,000 474,151.68 1,025,848.32
12/31/23 1,500,000 351,049.88 1,148,950.12
12/31/24 1,500,000 213,175.87 1,276,465.56
Present Value
5,685,000
4,867,200
3,951,264
2,925,415.68
1,776,465.56
500,000