Chapter 10 - Direct Financing Lease-LESSORGENERAL RULE:IF THERE IS A TRANSFER = IGNORE RESIDUAL VALUEIF THERE IS NO TRANSFER = CONSIDER RESIDUAL VALUE (REGARDLESS IF GUARANTEED OR UNGUARANTEED)

Gross Investment = Gross Rentals + Residual Value (whether guaranteed or unguaranteed) [THE AMOUNT DEBITED TO LEASE RECEIVABLE] = Residual Value is ignored if the lease provides for a transfer of titleGross Rentals = Annual Gross Rentals x Lease TermAnnual Gross Rentals = Net Investment in the lease / Present Value of an annuity of 1 for a number of periods = (Cost of Asset - PV of residual value)/PV of an annuity of 1Net Investment in the Lease = [Cost of the asset + Iniitial Direct Cost] = or [Annual Rental x Present Value of an annuity of 1 + PV of Residual Value (guaranteed or unguaranteed)]

Unearned Interest Income = Gross Rental - Net Investment - THE BALANCE IS A REDUCTION TO LEASE RECEIVABLE TO ARRIVE AT ITS CARRYING AMOUNT

---------------------------------------------------------------------------------------------------------------------------------------------------Problems with RESIDUAL VALUE AND THE LEASED ASSET WILL REVERT BACK TO LESSORAnnual Rental is computed as:Net Investment in the Lease - Present Value of RESIDUAL VALUE = Net Investment to be recovered from RENTALNet Investment to be recovered from RENTAL/Present Value of an annuity of 1 for a number of periods = Annual Rental

note: ignore RESIDUAL VALUE IF THE ASSET WILL NOT REVERT TO THE LESSOR

---------------------------------------------------------------------------------------------------------------------------------------------------if Fair Value of assset is LOWER than RESIDUAL VALUEunder guaranteed:Cashxx (receive the difference from lessee + guaranteed residual value)Assetxx (recorded at the lower of fair value and carrying amount) Lease Recievablexx

under unguaranteed:Loss on finance leasexx (receive the difference from lessee + guaranteed residual value)Assetxx (recorded at the lower of fair value and carrying amount)Lease Recievablexx

---------------------------------------------------------------------------------------------------------------------------------------------------ACTUAL SALE OF LEASED ASSETCASH RECEIVED - [LEASE RECEIVABLE - UNEARNED INTEREST INCOME or CARRYING AMOUNT OF LEASE RECEIVABLE] = Gain or Loss on sale