Lessor accounting refers to the accounting treatment from the perspective of a lessor, the entity that provides an asset for lease to another party, known as the lessee. Depending on the type of lease, the accounting entries can vary. The main types of leases are operating leases and finance (or capital) leases.
1. Operating Lease Accounting (Lessor)
In an operating lease, the lessor retains ownership of the asset, and the lessee uses the asset for a period in exchange for regular lease payments.
Example 1: Recording Lease Income
Assume a lessor leases equipment to a lessee for a monthly payment of $2,000. The lease term is 12 months, and the lease payments are made at the beginning of each month.
Journal Entry for Monthly Lease Payment:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Bank | 2,000 | |
| 01-01-2024 | To Lease Revenue | 2,000 |
Explanation:
- Bank is debited to record the receipt of the lease payment.
- Lease Revenue is credited to recognize the income from leasing the equipment.
Example 2: Depreciation of the Leased Asset
Assume the equipment leased out has a cost of $50,000 and a useful life of 10 years. The annual depreciation expense is $5,000.
Journal Entry for Annual Depreciation:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 5,000 | |
| 12-31-2024 | To Accumulated Depreciation | 5,000 |
Explanation:
- Depreciation Expense is debited to record the expense related to the wear and tear of the leased asset.
- Accumulated Depreciation is credited to reflect the accumulated depreciation on the asset over time.
2. Finance (or Capital) Lease Accounting (Lessor)
In a finance lease, the lessor effectively transfers the risks and rewards of ownership of the asset to the lessee, even though legal ownership may remain with the lessor.
Example 1: Recognition of Lease Receivable and Interest Income
Assume a lessor leases a machine to a lessee with a fair value of $100,000. The lease is for 5 years, with annual lease payments of $22,000, and the interest rate implicit in the lease is 5%.
Journal Entry at Lease Inception (to Derecognize the Asset and Recognize Lease Receivable):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Lease Receivable | 100,000 | |
| 01-01-2024 | To Equipment (Leased Asset) | 100,000 |
Explanation:
- Lease Receivable is debited to recognize the present value of the lease payments receivable from the lessee.
- Equipment (Leased Asset) is credited to remove the asset from the lessor’s books, as control has been transferred to the lessee.
Journal Entry for Annual Lease Payment and Recognition of Interest Income:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Bank | 22,000 | |
| 12-31-2024 | To Lease Receivable | 17,000 | |
| 12-31-2024 | To Interest Income | 5,000 |
Explanation:
- Bank is debited to record the receipt of the lease payment.
- Lease Receivable is credited to reduce the receivable balance.
- Interest Income is credited to recognize the interest component of the lease payment.
3. Sales-Type Lease Accounting (Lessor)
In a sales-type lease, the lessor recognizes the entire profit or loss on the asset sold (leased) at the commencement of the lease, along with interest income over the lease term.
Example: Recognition of Sales-Type Lease
Assume the same scenario as above, but the fair value of the asset exceeds its carrying amount. The carrying amount of the asset is $90,000, and the fair value is $100,000.
Journal Entry at Lease Inception (to Recognize Sale and Profit):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Lease Receivable | 100,000 | |
| 01-01-2024 | Cost of Goods Sold | 90,000 | |
| 01-01-2024 | To Equipment (Leased Asset) | 90,000 | |
| 01-01-2024 | To Sales Revenue | 100,000 |
Explanation:
- Lease Receivable is debited to recognize the present value of the lease payments.
- Cost of Goods Sold is debited to recognize the carrying amount of the asset being leased.
- Equipment (Leased Asset) is credited to remove the asset from the books.
- Sales Revenue is credited to recognize the revenue from the sale (lease) of the asset.
Subsequent Journal Entries for Lease Payments and Interest Income:
This would be similar to the finance lease example provided earlier, with the lessor recognizing interest income over the lease term.
These examples cover various lease types from the lessor’s perspective, showing how to record the transactions based on whether the lease is operating, finance, or sales-type.