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In June 2015 exam question the lease part had the following accounting treatment:
Kutchen manufactures equipment for lease or sale. On 31 March 2015, Kutchen leased out equipment under a
10-year finance lease. The selling price of the leased item was $50 million and the net present value of the
minimum lease payments was $47 million. The carrying value of the leased asset was $40 million and the
present value of the residual value of the product when it reverts back to Kutchen at the end of the lease term is
$2·8 million. Kutchen has shown sales of $50 million and cost of sales of $40 million in its financial statements.My question is why would the company record sales of $50m – I understood the lease treatment in balance sheet but why would they record sales and COS, you are only transferring the asset from asset to receivable and for interest income you would record sale.
Please advise.
Thanks in advance
Hi,
They record the sale as it is part of their business to lease out assets, so the initial lease is recognised as a sale and the asset removed, so if we break it down then it might help.
Have done:
DR Receivable 50
CR Sales 50
DR Costs 40
CR PPE 40What they should have done:
DR Receivable 49.8
CR PPE 40
CR Profit/loss 9.8 (the net effect of the sale and costs)They have taken a net figure of 10 to profit or loss so we need to reduce it by the 0.2 hence to correct:
DR Profit/loss 0.2
CR Receivable 0.2Hope this helps. It is tricky but is very rarely seen, however given the new leases standard it could be seen again soon.
Thanks
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