A simple table to understand the difference between various types of leases
The present value of all future rent payments is more than 90% of the FMV of the asset at date of lease inception
A leasing firm leases a machine to a user for 4 years starting January 1st of the year. The cost, as well as the transfer price is the same $ 50000. The first lease payment is immediate, on January 1st itself, with 3 more lease payments expected. The machine has an estimated life of 4 years. The owner expects a 10% return on his lease.
The accounting entries are.
Now let's see the amortization table.
For finding the interest for the year, we use the 10% target rate of the owner. Since the first payment is received early in the year, the interest at the end of the year is (50000-14339) x 10%
It will be much clearer if we look at the amortization entries.