Question

Compare / contrast a sales-type vs operating lease by the lessor;

1. Lease receivable
2. Recognition of interest revenue
3. Gross profit

Do not include the the 5 lease classification criteria in your answer.  

Answer 1

sales type lease is only a finance lease, except the owner makes an initial profit over the cost of the asset when the lease starts. In other words, the lease amount is greater than the cost of the asset. It can also be said that the present value of all the future payments will be greater than the cost of the asset.

In an operating lease, same as the capital lease, a leasing entity (the lessor or the owner) buys the asset for a user (the lessee or the hirer), rents it to the user for an agreed period. The user pays a rent periodically for the usage of the asset. The payment terms are all according to the lease contract.

1.    The lease term is considerably less than the life of the asset so that the asset retains a resale value at the end of the lease term

2.    The owner makes profit from the rent revenue stream. He may re-lease it to different parties at the end of each lease term. He may get good resale value too, once he is done with leasing.

3.    The asset remains in the balance sheet of the owner. The owner has to ensure that the resale value of the asset is not affected by use. The material risks and rewards lies with the owner.

This residual value is forecast at the start of the lease and the owner takes the risk that the asset will achieve this residual value or not when the contract comes to an end.

Ownership of the asset remains with the user and the asset will either be returned at the end of the lease, when the leasing company will either re-hire in another contract or sell it to release the residual value.  

	operating lease	sale type lease
who own the assest	leasing company	leasing company
who takes the risk of resale value	leasing company	not applicable
who is responsible for maintanace and repair	leasing company ,if maintanace contaract is taken	user
legenth of the lease	part of the economic life	most of the economic life
balancesheet tretment	owner balance sheet	user balancesheet
The profit for the owner	rent payment plus the resale realisation if he sells the assests	the initial profit at the time of transfer plus intrest income
if the present value of the future rent payment is more than 75% of the initial cost for the owner , if not for anything else	no	yes , if the profit is also made at the time of tranfer
if the contract allow for transfer of ownership to the user at the end of the lease term , if not for anything else	no	yes ,if the profit is also made at the time of tranfer
if bargain purchasing option for the user exist in the contract if not for anything else	no	yes ,if the profit is also made at the time of tranfer