Question

Describe the lessor’s accounting for direct-financing leases.   

Answer 1

Under direct financing lease a lessor leases the assets of the lessee, with the motive of earning interest income. Interest is only form of revenue that is generated under the direct financing lease.

In this method future receipt of the lease payment is accounted initillay as lease receivable.

And the difference between the accounted lease payment and cost of the asset is termed as unearned interest revenue

On receipts of the lease entry for receipt of lease oayment is made . Follwing is the journal entries:

1. At the beginning of the lease:

Lease Receivable A/c dr. xxxx

To unearned interest revenue xxxx

To asset A/c xxxx

(being lease recorded in the books)

2. On receipts of lease payment:

Cash A/c Dr xxxx

To lease receivable xxxx

(Being lease amount received)

3. Unearned Interest revenue Dr xxxx

To interset revenue xxxx

(being unearned interest reveune is converted into interest)