Week 5 Discussion Question 2: What are the differences between a direct financing and a sales type lease for the lessor? A direct financing lease is used by lessor in capital leases, when both of the following criteria for the lessor are met: • Collectibility of minimum lease payments is assured; and • No important uncertainties surround the amount of unreimbursable costs yet to be incurred. The lessor of a direct financing lease obtains property for the sole purpose of leasing the property. In using a direct financing lease, the lessor uses the interest rate implicit in the lease to discount the future payments from the lease. The difference between the gross investment in the lease and the cost of the leased property is reported as unearned interest income. Unearned interest income is the amortized using the interest method, therefore resulting in interest income over the life of the lease. Initial direct costs of the lease are expensed. A sales type lease is used by lessor when one or more of the four criteria of the capital lease
This is the end of the preview. Sign up
access the rest of the document.