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Hi Chris,
Please clarify me on below.
The asset is derecognized in the lessor’s books when there is a finance lease, which means the asset gets credited and lease receivable gets debited right?
However, the figure for lease receivable is the net investment in lease which could probably be different from the figure in the asset. And therefore there could be imbalance in the debits and credits right?Finance lease is where a bank buys an aeroplane and rents it out to an airline for 30 years.
So the PPE normally never enters the lessor’s books.
But:
If, for example, another airline owned the plane and then leased it out for 40 years, they will have a profit on sale (FV if sold for cash less CA).
Dr Lease receivable x
Cr PPE x
Cr P&L (balance) xThe lease receivable will be the same as ‘net investment in the lease’ – you see, net investment in the lease is really FV, but, in the exam, we are asked to work it out using a disgustingly complicated formula!
Okay understood. Then, let’s say the asset is sold for FV of 750,000 less CA of 700,000 there will be a profit on sale of 50,000. Then in the books of the seller, the lease receivable of 750,000 is going to be made up of the present value formula. I.e if let’s say the lease is gonna be for 5 years and the interest rate is 10%, then 750,000 will need to be divided by the annuity factor of 3.791 which will give the annual lease payment of 197,837. Is that correct?
Perfect – in reality the lessor does this and then says to the lessee – ‘if you want this deal, you will have to pay 197,837 /year’
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