Sales-Type Lease Accounting: Lessor Journal Entries | ASC 842

Learn sales-type lease accounting from the lessor's perspective: calculate lease payments, record the sale, build an amortization schedule and recognize interest revenue. Professor Farhat works a five-year equipment lease using a $95,000 fair value and $80,000 asset cost. CORRECTIONS & STUDY NOTES This recording uses "finance lease" loosely. The example is a U.S. GAAP sales-type lease under ASC 842. Lessor accounting also includes direct financing and operating leases; this is not an IFRS 16 lesson. Please use the classification and numerical clarifications below with the video. CHAPTERS 00:00 Lessor versus lessee: lesson scope 00:58 Sales-type lease concept 01:53 Review of the five classification criteria 03:42 Accounting for the asset sale 04:29 Present value and residual value 05:39 Boeing and Delta illustration 06:00 Supplemental accounting study resources 06:53 Five-year lease terms and collectibility 09:00 Calculate the annual payment 10:44 Why the payment is an annuity due 11:14 Initial entries and selling profit 12:21 Amortization schedule and first cash receipt 12:56 First-year interest accrual 14:19 Current and noncurrent presentation 14:52 Income statement presentation 15:13 Next cash receipt and later interest 16:38 Asset return and closing balance 17:22 More lease accounting practice WORKED EXAMPLE The illustrative Boeing/Delta arrangement has five beginning-of-year payments, a five-year asset life, 4% lessor yield, $2,926 expected residual and probable collection. These are teaching assumptions, not reported company transactions. Payment = [fair value − present value of residual] ÷ present value annuity-due factor. Using the stated inputs: [$95,000 − $2,926/(1.04^5)] ÷ 4.629895 = approximately $19,999.38, rounded in the lesson to $20,000. The first $20,000 receipt immediately reduces the initial $95,000 investment to $75,000; it contains no interest. First-year interest is $75,000 × 4% = $3,000. After the next payment, the balance is $58,000; second-year interest is $2,320, accrued December 31, X2. Some spoken dates and amounts around 14:09 and 15:46 are slips. At December 31, X1, the example shows $20,000 current and $58,000 noncurrent, totaling $78,000 before the next day's receipt. Rounding clarification at 16:38: Starting at exactly $95,000 with five payments of exactly $20,000 and a 4% yield leaves $2,810.112 after the fifth payment. Final-year interest is $112.40448 and the ending amount is $2,922.51648. The slide's $115.89 interest is a closing plug to reach $2,926, not 4% of the balance. Keep full precision and use consistent inputs; the exact $19,999.381584 payment reconciles to the stated $2,926 residual. RESIDUAL VALUE & INITIAL ENTRIES ASC 842 distinguishes the lease receivable from the unguaranteed residual asset; together they make up the net investment. Do not automatically label an unguaranteed residual a receivable. The video's gross $95,000 sales/$80,000 cost-of-sales entries assume the residual is guaranteed. The terms slide calls it an expected residual without identifying a guarantor. If it is unguaranteed, its approximately $2,405 present value reduces both gross sales and cost of sales: approximately $92,595 and $77,595. Selling profit remains approximately $15,000. The first receipt is debit Cash/credit the receivable $20,000; subsequent interest increases the net investment. These figures use the lesson's rounded $95,000 starting value. CLASSIFICATION CLARIFICATIONS • Generally, any one of the five sales-type criteria suffices; a failed individual test does not settle the classification. • The purchase-option criterion is reasonably certain exercise. The 75% and 90% thresholds are reasonable implementation benchmarks for major part/substantially all, not mandatory bright lines. • Failing the sales-type criteria requires evaluating direct financing classification before concluding operating. A separate operating-lease exception applies to certain variable-payment arrangements producing a selling loss. • If collection is not probable, sales-type recognition is restricted; it does not mean no contract exists. WHO THIS LESSON HELPS Intermediate accounting students and CPA BAR candidates practicing lessor entries. Study present value and annuities due first. The recording demonstrates the mechanics; consult the notes above for terminology, residual presentation and rounding. CONTINUE STUDYING Lease Accounting course:    • Lease Accounting: ASC 842, Lessee & Lessor...   More lectures and practice: https://farhatlectures.com Primary guidance: ASC 842-10 and ASC 842-30 at https://asc.fasb.org #LessorAccounting #SalesTypeLease #ASC842