ExpertHard1 markMultiple Choice
CPA · Question 38 · Area II: Technical Accounting
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?
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?
Answer options:
A.
Recognize $20,000 Selling Profit.
B.
Recognize $40,000 Total Profit.
C.
Recognize $20,000 Interest Income.
D.
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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