In a sale type lease,

what is the profit recorded by the lessor?

is it the difference of cost and "selling price/fv"

or is it the difference of cost and "pv of minimum lease payments"

and

if there is an executionary cost then do we add that to the cost.?

thanks

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FAR july 9th 2009 

profit = PV of minimum lease payments - cost.  Because the lessor's implicit interest rate is used, the PV of minimum lease payments = FV of asset less unguaranteed residual value accruing to the lessor.

not sure what you mean by executionary cost, but executory costs are expensed as incurred, and initial direct costs are expensed as selling expenses; neither is included in the cost of the asset.

thanks for your reply.

about the cost of good sold

in the becker book it says

cogs will be cost of the asset minus pv of unguaranteed residual and add any direct costs such as legal fees.

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FAR 7/06/09

Bisk says initial direct costs are expensed as selling expenses for sales type leases. Also from Kieso chapter 21, which cites SFAS 91:

Initial Direct Costs (Lessor)

Initial direct costs are of two types: incremental and internal. Incremental direct costs are paid to independent third parties for originating a lease arrangement. Examples include the cost of independent appraisal of collateral used to secure a lease, the cost of an outside credit check of the lessee, or a broker's fee for finding the lessee.

Internal direct costs are directly related to specified activities performed by the lessor on a given lease. Examples are evaluating the prospective lessee's financial condition; evaluating and recording guarantees, collateral, and other security arrangements; negotiating lease terms and preparing and processing lease documents; and closing the transaction. The costs directly related to an employee's time spent on a specific lease transaction are also considered initial direct costs.

However, initial direct costs should not include internal indirect costs. Such costs are related to activities the lessor performs for advertising, servicing existing leases, and establishing and monitoring credit policies. Nor should the lessor include the costs for supervision and administration or for expenses such as rent and depreciation.

The accounting for initial direct costs depends on the type of lease:

For operating leases, the lessor should defer initial direct costs and allocate them over the lease term in proportion to the recognition of rental revenue.
For sales-type leases, the lessor expenses the initial direct costs in the period in which it recognizes the profit on the sale.
For a direct-financing lease, the lessor adds initial direct costs to the net investment in the lease and amortizes them over the life of the lease as a yield adjustment.

In a direct-financing lease, the lessor must disclose the unamortized deferred initial direct costs that are part of its investment in the direct-financing lease. For example, if the carrying value of the asset in the lease is $4,000,000 and the lessor incurs initial direct costs of $35,000, then the lease receivable (net investment in the lease) would be $4,035,000. The yield would be lower than the initial rate of return, and the lessor would adjust the yield to ensure proper amortization of the amount over the life of the lease.