A lessor enters into a Sales-Type lease. - Gross Investment in Lease (Total Payments + Residual): $120,000 - Net Investment in Lease (PV): $100,000 - Carrying amount of asset: $80,000 What is the immediate effect on the Lessor's Income Statement at commencement?

Answer options:

Recognize $20,000 Selling Profit.

Recognize $40,000 Total Profit.

Recognize $20,000 Interest Income.

No immediate P&L impact.

How to approach this question

Sales-Type Lease = Sale of Asset. Profit = Fair Value (Net Investment) - Book Value. Interest comes later.

Full Answer

A.Recognize $20,000 Selling Profit.✓ Correct

At commencement of a sales-type lease, the lessor recognizes the Selling Profit (Fair Value - Carrying Amount). The Unearned Interest (Gross - Net) is deferred and recognized over the lease term.

Common mistakes

Recognizing the interest component immediately.

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A lessor enters into a Sales-Type lease. <br/>- Gross Investment in Lease (Total Payments + Residual): $120,000<br/>- Net Investment in Lease (PV): $100,000<br/>- Carrying amount of asset: $80,000<br/><br/>What is the immediate effect on the Lessor's Income Statement at commencement?

How to approach this question

Full Answer

Common mistakes

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