Question

How does the lessor’s initial journal entry differ between a sales-type lease and a financing lease? Is there a difference in impact on net income? Explain.

Answer 1

Journal entry by a lessor for a finace lease at the time fo the transaction
Lease receivable a/c                                   dr
to asset a/c
Journal entry by a lessor for a finance lease for periodic payments
Cash a/c                                                           dr
to lease receivable
to finance income
Journal entry by a lessor for a operating lease at the time of transaction'
Cash a/c                                                          dr
to lease rental income

In the early years a finance lease will lead to a higher net profit as the revenue will be recorded in the first year itself and in the subsequent years only the interest portion will be recorded in the income statement. Also as the asset will be written off from the books so the seller would not be able to charge depreciation. In the subsquent years the net income of a opearating lease will be higher as the complete portion of the payment is shown as rental income.