Question

A lessor enters into a sales - type lease. which following statements is true if the leased asset has an unguaranteed residual value?
a) the gross profit recognized is less than it would be if residual was guaranteed.
b) the gross profit recognized is more than it would be if the residual was guaranteed
c) the lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value.
d) The gross profit is the same as it would be if the residual was guaranteed.

Answer 1

Answer: C)the lessor should decrease the cost of goods sold by the amount of the unguaranteed residual value.

EXPLANATION:

When the residual value is unguaranteed, the the sales revenue and cost of goods sold must be subtracted by the present value of unguaranteed residual amount by the lessor. As, the sales revenue and COGS reduce by the same amount, this does not affect the amount of gross profit. However, the lessor shall recognize the profit or a loss if the value of the leased item is differs from the unguaranteed residual amount at the expiry of the lease period.