International Financial Reporting Standards_guide.pdf

Chapter 14 Leases (IAS 17) 163
Books of the Lessor
The gross amount of $465,000 due by the lessee would be recorded as a debtor at inception
of the contract, that is, the deposit of $30,000 plus six installments of $72,500 each. The
unearned finance income of $135,000 is recorded as a deferred income (credit balance). The
net amount presented would then be $330,000 ($465,000 – $135,000).
The deposit and the first two installments are credited to the debtor account, which will then
reflect a debit balance of $290,000 at December 31, 20X2.
A total of $66,263 ($35,320 + $30,943) of the unearned finance income has been earned in the
first year, which brings the balance of this account to $68,737 at December 31, 20X2.
The Statement of Comprehensive Income for the year ending December 31, 20X2, will
reflect finance income earned in the first year in the amount of $66,263.
The Statement of Financial Position at December 31, 20X2, will reflect the net investment as
a long-term receivable at $221,263 ($290,000 – $68,737), which agrees with the liability in the
books of the lessor at that stage.
EXAMPLE 14.2
Using the following information, what is the entry to record the assets being leased at the
time of signing the lease (inception date)?
Asset 1: Lease payment of $15,000 per year for 8 years, $20,000 fair market value purchase
option at the end of Year 8 (guaranteed by the lessee to be the minimum value of the equipment),
estimated economic life is 10 years, fair market value of the leased asset is $105,000,
and the interest rate implied in the lease is 10 percent.
Asset 2: Lease payment of $15,000 per year for 8 years, $35,000 fair market value purchase
option at the end of Year 8 (guaranteed by the lessee to be the minimum value of the equipment),
estimated economic life is 12 years, fair market value of the leased asset is $105,000,
and the interest rate implied in the lease is 10 percent. The company’s incremental borrowing
rate is 11 percent.
Options:
a. No entry
b. $89,354 increase in assets and liabilities
c. $192,703 increase in assets and liabilities
d. None of the above
EXPLANATION
Issue 1: Determine whether the leases are finance or operating.
Issue 2: Determine the accounting entries needed.