Lessee leases copy machine from Lessor. Lessor agrees to provide all maintenance

Question

Lessee leases copy machine from Lessor. Lessor agrees to provide all maintenance service. Lease payment is $1000 per month. Maintenance service has FMV of $200/month. What are the lease components within this contract? What amount of lease payment will be used in measuring the lease liability/payable by Lessee/Lessor?

How will the Lessee and Lessor account for initial direct costs?

At what amount does a Lessee measure the Lease liability in a Financing lease? Operating lease?

At what amount does a Lessee measure a Right of Use Asset in a Financing lease? Operating lease?

Over what period does a Lessee amortize the Right of Use Asset in a Financing lease? Operating lease?

How does the Lessee’s amortization of Right of Use Asset differ between Financing lease and Operating lease?

How does Lessee report the amortization and interest components of lease expense on the income statement under an Operating Lease?

How does the Lessor’s discount rate differ when initial direct costs are capitalized versus when they are not capitalized?

At what amount does a Lessor measure the “Investment in Lease” asset account in a Sales lease? Direct Financing lease?

Does a Lessor recognize profit in a Direct Financing Lease?

In a Sales lease in which the leased asset cost differs from market value at lease inception, how much sales revenue does the Lessor recognize? How much cost of sales does the Lessor recognize?

Explanation / Answer

The lease component within any contract can be the fixed lease payments, a fixed component of variable lease payment, early termination fees, non refundable deposit, residual value guarantees etc.The lease component in given contract is the lease payment which is $1000 per month. The lease liability to be paid on part of lessee is $1000per month while lease liability on part of lessor is the cost of service maintainence of the machine. Initial direct cost is that cost which is incurred in order to complete an agreement.As per International accounting standards 17 initial direct cost incurred by lessors is required to be capitalised and amortised over the period of agreement of lease & lessee will add the amount of initial direct cost to the amount which is recognised as an asset. The lessee measures the lease liability in a financing lease/operating lease is when the present value of lease payments are discounted @ discounted rate or borrowing rate. The lessee measures the right to use asset in a financing lease/operating lease is by adding lease liability's initial amount, any lease payments made before the lease commencement date, any initial direct costs and deducting any lease incentives received.

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