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Worked-example setupScope and assumptions
- Linden Peak, the three leases, classification, collectibility, residual, fair-value, carrying-amount, rate, and initial-direct-cost conclusions are fictional and supplied.
- The sales-type line has five $20,000 year-end payments, a 7 percent implicit rate, $75,000 carrying amount, $82,003.94871895191 fair value, and $1,000 initial direct costs.
- The direct-financing line has six $9,500 year-end payments, $13,000 unrelated-third-party guaranteed residual, $7,000 unguaranteed residual, $54,000 carrying amount, $62,000 fair value, $2,000 initial direct costs, 4.6458369707536584 percent gross measurement rate, and 8.257987131214095 percent net-investment yield.
- The operating space has four $12,000 year-end payments, $100,000 carrying amount and fair value, and $2,000 qualifying initial direct costs; depreciation is outside this bounded schedule.
- Collectibility is supplied as probable and the ASU 2021-05 variable-payment/day-one-loss exception does not apply.
- Period
- Commencement through the end of each fictional lease term
- Units
- US dollars and annual periods
- Rounding
- Retain full precision; display dollars to cents and rates to at least six decimals
Problem
Linden Peak leases three assets to customers. The classification committee has supplied one sales-type, one direct-financing, and one operating conclusion. The close team must prove that each route leaves the correct asset, recognizes the correct commencement result, and produces a subsequent schedule that ends at the expected residual.
Sales-type: recognize the transfer and later financing income
The PV of five $20,000 year-end payments at 7 percent is $82,003.94871895191. With no residual, that is both lease receivable and initial net investment. Against the $75,000 carrying amount, commencement selling profit is $7,003.948718951913. Because fair value differs from carrying amount, the supplied $1,000 initial direct cost is expensed.
Year 1 interest income is $82,003.94871895191 × 7 percent, or $5,740.2764103266345. After the $20,000 receipt, net investment is $67,744.23. The fifth receipt settles it to zero.
Direct financing: expose residuals and deferred profit
At the supplied 4.6458369707536584-percent measurement rate:
| Component | Present value |
|---|---|
| Six payments plus $13,000 guaranteed residual | $58,669.52 lease receivable |
| $7,000 unguaranteed residual | $5,330.48 residual asset |
| Gross components | $64,000.00 |
| Deferred selling profit | $(8,000.00) |
| Initial net investment | $56,000.00 |
The $8,000 deferred amount is the receivable less the underlying asset's $48,669.52 carrying amount net of residual, less $2,000 qualifying initial direct costs. No selling profit is recognized at commencement.
The 8.257987131214095-percent net-investment yield produces Year 1 interest of $4,624.472793479893. Six receipts reduce net investment to the expected $20,000 combined guaranteed and unguaranteed residual. The schedule therefore does not settle to zero.
Operating: retain the underlying asset
Linden Peak keeps the $100,000 underlying space in PP&E and continues the applicable depreciation and impairment accounting. It recognizes $12,000 annual lease income and $500 annual initial-direct-cost expense, for $11,500 net lease income before depreciation. Initial net investment is zero.
Three release questions
| Lane | Asset after commencement | Day-one result | Later income |
|---|---|---|---|
| Sales-type | Net investment | Selling profit or loss under collectibility controls | Interest on net investment |
| Direct financing | Net investment net of deferred profit | Selling loss if applicable; selling profit deferred | Interest including deferred profit pattern |
| Operating | Underlying PP&E | No sale-style profit | Lease income; continued asset accounting |
The schedule verifies supplied amounts and rates. It does not classify the leases, establish collectibility, value the assets or residuals, decide whether ASU 2021-05 applies, or approve the disclosure.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · lease accounting analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- lessor schedules
- 3 fields
Inspect data
{
"direct_financing_line": {
"carrying_amount": 54000,
"classification": "direct_financing",
"fair_value": 62000,
"guaranteed_residual_value": 13000,
"initial_direct_costs": 2000,
"measurement_annual_rate": 0.046458369707536584,
"net_investment_annual_rate": 0.08257987131214095,
"payment_amount": 9500,
"payment_timing": "arrears",
"payments_per_year": 1,
"total_periods": 6,
"unguaranteed_residual_value": 7000
},
"operating_space": {
"carrying_amount": 100000,
"classification": "operating",
"fair_value": 100000,
"guaranteed_residual_value": 0,
"initial_direct_costs": 2000,
"measurement_annual_rate": 0.05,
"net_investment_annual_rate": null,
"payment_amount": 12000,
"payment_timing": "arrears",
"payments_per_year": 1,
"total_periods": 4,
"unguaranteed_residual_value": 0
},
"sales_type_line": {
"carrying_amount": 75000,
"classification": "sales_type",
"fair_value": 82003.94871895191,
"guaranteed_residual_value": 0,
"initial_direct_costs": 1000,
"measurement_annual_rate": 0.07,
"net_investment_annual_rate": null,
"payment_amount": 20000,
"payment_timing": "arrears",
"payments_per_year": 1,
"total_periods": 5,
"unguaranteed_residual_value": 0
}
}Recomputed result
| Measure | Value |
|---|---|
| direct financing line deferred selling profit | 8,000 |
| direct financing line ending net investment | 20,000 |
| direct financing line initial net investment | 56,000 |
| direct financing line lease receivable | 58,669.5202 |
| direct financing line period 1 interest income | 4,624.4728 |
| direct financing line unguaranteed residual asset | 5,330.4798 |
| operating space periodic initial direct cost expense | 500 |
| operating space periodic lease income | 12,000 |
| operating space periodic net lease income | 11,500 |
| operating space underlying asset retained | 100,000 |
| sales type line initial direct cost expense | 1,000 |
| sales type line lease receivable | 82,003.9487 |
| sales type line period 1 interest income | 5,740.2764 |
| sales type line recognized selling profit | 7,003.9487 |