LEC Leases

JARD-REF3-L-LEASES

ACCOUNTING FOR LEASES
LEASE
An agreement whereby a lessor conveys to the lessee, in return
for payments or series of payments, the right to use an asset
for an agreed period of time.
FINANCE LEASE (BPOL)
 Bargain purchase option
The lessee has the option to purchase the asset at a price
which is expected to be sufficiently lower than the fair
value at the date the option becomes exercisable such
that, at the inception of the lease, it is reasonably certain
that the option will be exercised.
 Present value of minimum lease payments
At the inception of the lease, the present value of the
minimum lease payments amounts to at least
substantially all of the fair value of the leased asset,
whether or not title will pass to the lessee.
 Ownership transferred
Ownership of leased property to the lessee at the end of
the lease term.
 Lease term
The lease term is for the major part of the economic life of
the leased property even if title is not transferred.

FINANCE LEASE - Lessee’s Viewpoint
 Accounted for as a purchase on a deferred payment
contract. An asset and a liability are recognized at the date
of lease commencement.
 Cost assigned to the leased asset is the present value of
the minimum lease payments. Capitalized cost of the
leased asset should not exceed its fair value at the
inception of the lease.
 The lessee computes the present value of MLP using the
interest rate implicit in the lease; if this is practicable to
determine; otherwise, the lessee’s incremental borrowing
rate should be used.
Inception of the Lease
Leased Equipment
Finance Lease Obligation

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Subsequent Payment
Interest Expense
Finance Lease Obligation
Cash

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OPERATING LEASE - Lessor’s and Lessee’s Viewpoint
 Accounted for by both parties as a simple rent agreement.
The lessor records the rentals received as rent revenue
whereas the lessee records the rental paid as rent
expense.

Annual Rent Expense/Income 
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Total lease payments
Lease term

Initial direct costs incurred by the lessor are added to the
carrying amount of the leased asset and recognized as
expense over the lease term.
Depreciation of the property is recognized by the lessor.
Executory costs are charged to expense or to a regular
expense account.
Contingent rentals are added to the rent revenue/expense
in the period in which they arise.

Lessee’s Books
Rent Expense
Cash
Rent Payable
Lessor’s Books
Cash
Rent Receivable
Rent Income

-ADAMSON UNIVERSITY-

If unexercised
Loss on Finance Lease
Accum. Depreciation - Leased Equipment
Leased Equipment

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Depreciation of the leased property is recorded and
computed as follows:
 Based on the economic life; if there is reasonable
certainty that ownership will be transferred by the
end of the lease term.
 Based on the shorter of the lease term or its useful
life, if there is no reasonable certainty that the lessee
will obtain ownership at the end of the lease term.

Exercise of Bargain Purchase Option
Equipment
Accum. Depreciation - Leased Equipment
Leased Equipment
Cash

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JARD-REF3-L-LEASES

FINANCE LEASE - Lessor’s Viewpoint
Manufacturer’s/ Dealer’s Lease
 Lessor is a manufacturer or dealer which uses leases as a
means of selling its products.
 Lessor recognizes two types of revenue:
 Manufacturer’s or dealer’s profit - gross profit
 Interest income
Finance Lease Receivable
Sales
Unearned Interest Revenue

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Cost of Goods Sold**
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Unearned Interest Revenue*
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Inventory
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* = Present Value of Unguaranteed Residual Value
** = Use the account as Balancing Figure
Direct Financing Lease
 Lessor is a financing company which acquires the asset
specifically for leasing.
 Lessor only recognizes only one type of revenue, that is
interest revenue.
Finance Lease Receivable
Asset Purchased for Lease
Unearned Interest Revenue

-ADAMSON UNIVERSITY-

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